It is that time of year again. Tax time.
The dreaded annual routine where you compile all of your state and federal tax forms into an envelope and shuffle it off to your accountant. Alternatively, you may use a tax software and do it yourself – something many people do these days if their filings are fairly simple.
At the end of 2017, the Trump Administration signed into law a massive tax overhaul in an attempt to simplify the tax filing process. This law lowered the tax bill for many and raised it for some. Perhaps the most impactful portion of the Tax Reform law was the fact that corporate taxes have become far more competitive in a global economy. This is important and the actual results will not be fully revealed for some time but the initial response has been positive.
But one item buried within the law may impact cryptocurrency traders. Whether you trade BTC, ETH or XRP – this is something you should discuss with your accountant to determine whether it impacts you. Now I am no accountant nor tax attorney, but Joshua Ashley Klayman, a Blockchain attorney with Morrison Foerster who is co-chair of the firm’s Blockchain + Smart Contracts Group, has shared some commentary on possible implications for traders in cryptocurrency. Klayman points out she is not an accountant nor a tax attorney so be certain you check with your own tax professional first.
While crypto may be new and cool you still cannot dodge the taxman;
“Whether or not U.S. token purchasers are aware of it, some aspects of the new U.S. Tax Reform Bill may have a very real effect on them individually,” says Klayman. “The new tax laws clarify that, when a token purchaser buys a digital token using another digital token, it could be a taxable event.”
Why is that important?
Because it is a change as to how some individuals that trade in crypto have been reporting their taxes (if they have been reporting the gains or losses at all). This change revolves around the definition of real property.
Jeannette Spaulding recently wrote about this change, explaining the real property enigma;
“Firstly, the bill limits the exception to real property only. Real property can be defined as a tangible asset that has value due to its physical substance. Intangible assets such as cryptocurrency coins clearly do not fall into this category. Secondly, the bill limits the exception to property that is not held primarily for sale. It’s safe to say that the premise of cryptocurrency trading is to buy coins in order to sell them. Therefore, traded coins also fail to meet this second requirements for the tax exception.”
Klayman clarifies this further;
“To put it into perspective, purchasers using Bitcoin or Ether to purchase alt-coins in initial token offerings may have taxable events, not just when they sell those alt-coins, but also at the moment of purchase of the alt-coins.”
Previously, some people had taken the position that exchanging one digital token for another token may qualify as a like-kind exchange (also known as a 1031 exchange frequently used in Real Estate transactions). Klayman says that in this case, taxes may have been deferred when digital tokens were exchanged for other tokens and there may have been no “taxable event” until the tokens were ultimately traded for fiat currency such as U.S. dollars, Euros, Pounds etc..
“The new tax laws limit like-kind exchanges to real property not held for primarily for sale, which may take the wind out of the sails for token purchasers hoping to rely upon that exemption,” adds Klayman.
This is an important policy shift. Remember, the Feds have been stepping up their game when it comes to cryptocurrency trading, ICOs and digital currencies in general. Towards the end of last year, Coinbase was compelled by the courts to hand over account Info to IRS for users that transacted $20,000 or more in crypto during the years 2013 to 2015. What do you think the IRS is going to do with this info? Just stare at it? Not.
Reliance on tax deferral when digital tokens were exchanged for other digital tokens was cautioned against by many lawyers, explains Klayman. Lawyers had pointed out instances where other exchanges were not considered like-kind exchanges—for instance, when trading other commodities such as cattle or gold coins.
“Token purchasers should carefully track their token purchases and sales, as they may be responsible for paying taxes that they could owe,” says Klayman.
Since many people use multiple exchanges to trade in Crypto – the process of tracking transactions can be pretty laborious. Some crypto platforms will provide gain / loss reports which can make tax reporting far easier so you may want to check with your exchanges to see if they offer this type of service. Alternatively, there are platforms like Zenledger that enables users to import data from many exchanges to create a single document to assist with tax filing.
“The changes arguably add complexity to some token purchasers’ tax calculations and may create a significant need in the market. While I cannot vouch for any particular company or service, start-ups like ZenLedger and others appear to be focused on this issue,” adds Klayman.
Cryptocurrency values have been on a roller coaster ride when it comes to valuations. Towards the end of 2017, Bitcoin surpassed $20,000 at one point. Today, Bitcoin is trading near $8000 representing a significant hair cut for anyone that bought at or near the high. But if you made money last year, your probably on the hook. And as more and more individual investors enter the cryptocurrency space, tax questions become more pressing for both the investors and tax authorities.
And it is not just the IRS that has become keen to learn more about Crypto. The SEC and CFTC have plunged into the digital currency world with vigor. The SEC has recently taken action against multiple initial coin offerings (ICOs) with their new Enforcement Cyber Unit that targets misconduct in areas including the Blockchain and ICO realm.
“New year, new rules,” states Klayman.
So word to the wise. Regardless of the country where you report your taxes – be certain to speak to an accountant who is knowledgable on crypto. When it comes to the taxman – it is always best to be prepared.