Taxation of Capital Gain Property (Like Cryptocurrency)

Curious about the taxation of cryptocurrency? In March of 2014, the IRS issued Notice 2014-21 (https://www.irs.gov/pub/irs-drop/n-14-21.pdf) which determined that cryptocurrency should be taxed as an investment subject to capital gain/loss treatment. Taxation would be due upon the sale of the cryptocurrency. What wasn't clarified, however, was whether section 1031 (like-kind exchange rules - https://www.law.cornell.edu/uscode/text/26/1031) would apply in the instance where a cryptocurrency was exchanged for another cryptocurrency.

In the tax law recently passed by the Trump administration, clarification was given to the question of whether cryptocurrency would be subject to section 1031. The answer was a resounding no. For all transactions occurring after December 31, 2017, an exchange of one cryptocurrency for another cryptocurrency will constitute a sale and be subject to U.S. income taxes. The last big question that remains outstanding is whether the IRS will try and enforce the law retrospectively or not. Regardless of whether a taxpayer takes a more aggressive position (treating transactions before 2018 as exempt under 1031) or a more conservative position (treating transactions before 2018 as not exempt under 1031), anyone dealing in cryptocurrency should consider filing a tax return to start the clock on the statute of limitations (3 - 6 years for filed returns - unlimited for unfiled returns - https://www.law.cornell.edu/uscode/text/26/6511). The statute of limitations is the amount of time that the IRS has to come after you or for you to request a refund from the IRS.

Capital gains are broken out into two different categories: 1) long-term capital gains; and 2) short-term capital gains. Long-term capital gains are taxed at a preferred rate (0% to 20% depending on your taxable income) while short-term capital gains are taxed at the marginal rate (0% to 39.6% depending on your taxable income). To qualify for long-term capital gain treatment, an investment must be held for over a year. To the extent that an investment is disposed of in less than a year, it will be subject to short-term capital gain treatment (https://www.law.cornell.edu/uscode/text/26/1222 see also https://www.law.cornell.edu/uscode/text/26/1). To determine the amount of tax associated with any given investment account, the basis of the assets at any given point in time would have to be known. To ascertain this, a transaction history would likely be necessary.

Recently, the IRS has been aggressive in going after large exchanges such as Coinbase by issuing "John Doe" summons (https://www.forbes.com/sites/greatspeculations/2017/08/15/cryptocurrency-traders-risk-irs-trouble-with-like-kind-exchanges/#294673b026a8). The idea behind these actions is to obtain information on the taxpayers from a centralized source. Likely, the IRS will issue reporting requirements for these exchanges which will increase the ease of enforcement. Although the IRS has not yet perfected its methods for pursuing taxpayers like it has with stocks and bonds, it's been undergoing the necessary steps to increase their enforcement capabilities.

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.