Updated Bitcoin and Cryptocurrency Taxes in a Nutshell

There are a number of rules that have changed and some that stay the same

Leah Zitter
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While President Trump’s Christmas gift of cryptocurrency tax regulations has expunged obscurity, it has also disappointed a lot of people. But, then, that’s to be expected. Uncle Sam has long hankered after our crypto, and with predictions of the cryptocurrency market cap hitting $2 trillion the coming year, our benevolent “uncle” was bound to come cracking down sooner than later.

He did so.

Crypto Tax Rules That Remain

1. Foreign Asset Reporting Requirements

Where is your Bitcoin account based? How many bitcoins does it hold? Non-US holdings that store more than 10,000 bitcoins need to report to the Treasury using FinCen form 114 and to the IRS using form 8938.

2. Short-Term vs. Long-Term Capital Gain

Since the US, ironically, groups cryptocurrency under “property” (although given it's virtual reality, it is anything but that), crypto investments are bundled under short and long-term capital gains. Short-term capital gain is where you hold bitcoin, or other crypto, less than a year. These are subject to regular income tax that range anywhere from 10 to 37 percent depending on your income level.

Conversely, digital coins held for longer than a year are subject to long-term capital gains tax, which caps at 20%.

The counter-intuitive result of this plan is that you’ll pay significantly less in taxes if you hold your bitcoin more than a year. In fact, the longer you sit on your bitcoin, the less taxes you pay. One more reason to “hodle”, as bitcoiners put it.

Crypto Tax Rules That Change, Jan. 1, 2018

1. No More Like-for-Like loophole

Like-for-like gives you the option of swapping one item for a similar one within a certain time period (typically 180 days), so you forfeit taxes. Investors in trades like real estate, art, racehorses and aircraft love to use this loophole. It gets complex. For example, a beef cow cannot be swapped for a dairy cow, nor is it clear that a Rembrandt can be swapped for a Jackson Pollock. Legalists make a living debating the exceptions.

Well, as regards cryptocurrency, Trump just made it easier by cancelling all like-for-like loopholes. There’s no swapping Bitcoin for Ripple, Ether, Litecoin, Doge, Monero, or any other crypto, for that matter. You have to pay taxes on all. Finis.

2. It’s “Specific Identification”

Accountants choose one of four common methods to calculate capital gains. These are First-in, first-out (FIFO), Last-in, first-out (LIFO), Weighted average, and Specific identification. Under FIFO, you’re taxed on your first few items sold whereas LIFO is the reverse. With weighted average, you pay the average of the cost of all items in inventory - which can turn out to be rather expensive. The last method, Specific identification, which is usually used for expensive commodities, gives you the most autonomy. Here, you pick a specific set of securities (or crypto investments, in this case), giving you some control over how much tax you pay.

3. Away With the Cryptocurrency Tax Fairness Act

Right now, cryptocurrencies like Bitcoin are classified as property, which means you’re taxed for every single transaction, no matter how small the gain. The Cryptocurrency Tax Fairness Act (CFTA) that Rep. Jared Polis, D-Colo., and Rep. David Schweikert, R-Ariz. introduced in September, 2017, waived tax from all crypto transactions under $600. In this way, you could use bitcoin to buy a cup of coffee, and not trigger an obligation to the IRS - exactly as occurs with foreign or with “regular” currency. The CFTA, in short, was intended to incentivize Bitcoiners to spend rather than hoard crypto. According to Trump’s Administration, there are no exclusions to taxation. Off with the CFTA!

4. Donating Helps you Save

If there’s any comedy in this tragedy of tax rules, it’s this: Old-fashioned charitable organizations like Salvation Army or Goodwill may be advised to inform themselves on post-modernistic Bitcoin and its ilk, and set up some Bitcoin donation buttons.

It’s good for you. It may be good for them.

Donate your bitcoins and you can get a deduction on your taxes as well as avoiding tax on your gain.

For law abiding investors, none of these tax reforms will be easy, particularly since Bitcoin exchanges have yet to come out with a 1099 form for customers that report a summary of investment income.

Also - and to be expected - IRS has gone on hands and feet to make things harder for you.

Since the total market capitalization of all cryptocurrencies has appreciated over the last year to the whistling tune of more than $600 billion, the IRS wants every penny. And every penny it grabs is with special software, developed by a Swiss company called Chainalysis, to find bitcoin users who fail to report profits.

At the same time, the IRS rejected the amendment proposed by Rep. Jared Polis (D-Co.) to lighten the reporting requirements for digital currency.

Well, what did you expect? These new tax rules for your crypto are the Grinch of a deal.

Happy New Year!

Resources

Coinbase - Coinbase has a rough tool for calculating cryptocurrency taxes. It’s free so that’s the good news. It’s susceptible to mistakes, per the video shown on The Cryptobdb, so that’s the bad news.

It largely works as long as you use it for simple needs, such as hoarding, rather than trading, and as long as you retain your hoardings under the Coinbase vs GDax systems. Both of these are trusted crypto asset exchanges. The moment you transfer any of your coins to an external wallet or another site, Coinbase may erroneously report these as “sales”.

BitcoinTax - There’s a free version for low numbers of transactions, whether Bitcoins, Litecoins, Dogecoins or anything else. For anything more complex, BitcoinTax offers a 19.95 version per tax year that allows unlimited transactions. which helps if you trade and is your nearest step to getting a qualified accountant.

Bitcoin Tax Attorneys, CPAs and Accountants - The more trading you do, the more complex your accounts will likely be. That’s where a qualified tax attorney, CPA or tax accountant who knows bitcoin and digital currencies can guide you. BitcoinTax compiled a Directory of Bitcoin Tax Professionals to help you.