The Tax Man vs. The Cryptocurrency Investor

On the last Friday before Christmas, most of us were making last minute plans on what to get, what to do, and who to invite to our Christmas celebration. Little did we, the cryptocurrency investor know, that the Grinch was planning on inviting himself to our pocketbooks!

Yes, on the last Friday before Christmas of 2017, American president Donald Trump signed his new tax bill into law. It was to prove to be the first major tax overhaul in the U.S. tax code in over 30 years, and it had a lump of coal in it for those of us who invest in cryptocurrency. Simply stated:

Starting on the first day of 2018, ALL cryptocurrency trades will be taxable. Plain and simple. This even includes swapping one cryptocurrency for another.

Those who dabble in cryptocurrency were not the only ones affected, however. Plainly stated, the new tax code set out to shut down the 1031 loophole, which basically provided an exemption for "like-kind exchanges". What does this mean you ask? Basically, you used to be able to swap one asset for a "similar asset" without having to pay the tax man.

Let's go back to 2014 for some background information on all this. In March of that year, the IRS started down its path of treating Bitcoin (as well as other forms of digital currency) as property when it came to taxation. In other words, they were subject to capital gains tax when they were swapped out for cash or another currency. The key to this whole situation is the phrase "cash or another currency".

You see trading between one cryptocurrency to a different cryptocurrency was never clearly defined as to whether it was a "like kind exchange" or not. It was passed off as a "gray area" and the cryptocurrency investor benefitted because they were able to defer taxes on short-term capital gains. These trades kind of "flew under the radar" of the taxman if you will.

This new tax code narrows the definition of the 1031 exemption. How narrow? So narrow that Bitcoin is now totally on the outside looking in. The 1031 exemption now only covers real estate swaps. Ugh!

Let's cut to the chase, shall we? Starting in January of 2018 all trades in "whatever" form of cryptocurrency are taxed at the time the trade is executed. This was a great loophole and very lucrative. Sorry to see it go. Now, you will need to hold onto your cryptocurrency purchase for over a year to keep the taxman at bay.

Will cryptocurrency investors comply with the law? Statistics show that fewer than 1000 people (yes, ONE THOUSAND PEOPLE IN THE ENTIRE UNITED STATES), paid taxes on bitcoins between 2013 and 2015.

The Grinch showed up on the Friday before Christmas. The verdict is still out on whether he will be able to take any of the presents and gifts and "stuff them up the tree" as it were...