Did you get in on some of that hot cryptocurrency action in 2017? If you did, congrats, but don’t think you can cash out tax free! As a US citizen, you owe some of those gains in the form of taxes.
Tax treatment for Bitcoin and other Cryptocurrencies
According to the official IRS guidelines from 2014, bitcoin and other alt coins are treated as property and not currency. So as property it’s comparable to stocks, bonds, and other property investments and general tax principles applicable to property transactions.
That means, as property, it’s subject to Capital Gains taxes. Selling for fiat, trading other coins (2018), or purchasing anything is treated as a taxable event! Pretty annoying, but knowing, you should keep very careful records.
Quick, What’s Capital Gains?
It’s the gains (or loses) on property when you sell a property. If you bought a BTC for $500 and sold it for $2000, then you earned $1500 profit which you owe taxes on. If you held the asset for over a year you pay long term capital gains (0%-20% federal tax + x% state tax) which is taxed lower then short term capital gains which is taxed at your normal income rate. If you have a lose on your property then you can get a deduction as well up to $3000 a year which can be carried over.
Capital gains (or loses) are only filed in the year you sell the asset. Also if you’re using cryptos like a currency and spending, it you technically owe taxes every time you purchase anything. Good luck tracking and reporting all that! ?
2017 Tax Technique Trading Cryptos
In 2017, if you were trading bitcoin for other cryptos, there is a “loop hole” which you should be able to take as it’s been widely written about. It’s called Like-Kind Exchanges Under IRC Code Section 1031 which means that you can trade property for a very similar property without triggering taxes. Normally, when you sell a property you owe capital gains, but under Section 1031 you can exchange for like-kind property and defer taxes keeping your original basis.
2018 Tax Changes
The IRS recently amended the Like-Kind exchanges to eliminate Crypto exchanges from falling under this rule. In Section 13303 the term “property” has been replaced with “real property” which eliminates crypto trading from deferring taxes.
Why is this important?
In 2017: This is super crucial as it protects you from owing a whole lot of money potentially. If you bought 1 BTC (Bitcoin) for $1000 and traded it for Ethereum when BTC reached $10,000 in 2017, then your basis stays at $1000 and you don’t owe any taxes on that transaction. When you do sell you ETH for US Dollars, then you owe taxes on the gains you made since you originally bought at $1000.
What if after you traded your BTC for ETH at $10,000, the entire Crypto currencies market crashes and your investment is only worth $1000 again? When you sell your ETH for $1000, you gained nothing and owe nothing.
In 2018: If you trade your $10,000 BTC for ETH, that’s a taxable event and you’ll owe taxes on your $9000 gain at the time of trade. In California, that’s could be $2160 if you’re making decent income (15% federal tax, 9% state tax). Now if the crypto market crashes and your ETH is only worth $1000, you still owe the taxes unless you sell within the same tax year to cancel out the capital gains.