How will crypto be taxed? A punitive truth.
I'm not sure whether the IRS is suffering from naivety, disorganization, vindictiveness or all of the above because when it comes to cryptocurrency, the 2018 crypto tax policy isn't playing very nice. For perspective, allow me to illustrate how long-term capital gains taxes currently work with foreign currencies:
As it stands, US citizens can buy foreign currency as an investment and are only taxed when we convert that foreign currency to USD, regardless of whether it increases in USD exchange value. The "gains" are simply treated as ordinary income. For example, suppose I exchange $500 USD for 5000 pesos. Twelve months later, the peso "increases in value" and now I can exchange it (for USD) with a $125 GAIN. The $125 is taxed as ordinary income. Suppose instead of exchanging pesos for dollars, I use the $125 to buy some expensive Tequila. The $125 is still treated as ordinary income. Suppose instead of the peso STRENGTHENING, it weakens in value and I lose $125. The $125 is now a loss and tax deduction.
Cryptocurrency on the other hand, despite every law of finance & commerce supporting it as a currency, is not considered a currency by the federal government. Cryptocurrency is treated as an asset, specifically "property." Now, I'm not sure how many US citizens actively mortgage their homes to buy a car or use a recreational boat to purchase a Hawaiian cruise but apparently, the US government is convinced.
"Crypto as an asset" is upsetting because crypto-holders have to pay long-term capital gains AND every cryptocurrency transaction (such as trading) is treated as a "taxable event."
CRYPTO: LONG-TERM CAPITAL GAINS
Suppose I exchange $500 USD for 50000 altcoins. Twelve months later, the altcoin "increases in value" and now I can exchange it (for USD) with a $125 gain. The $125 is taxed at a 15-20% long-term capital gain rate. Suppose instead of exchanging altcoins for USD, I use the $125 to buy a Starbucks card. The $125 gain is still taxed at 15-20% AND the action of purchasing a Starbucks card with the altcoin is considered a taxable event.
TAXABLE EVENTS
Say you buy some Bitcoin for $6K and it rises in value by $1,000 within the same hour/day/week (doesn't matter) so now you theoretically have $7K (if you converted it to USD) and you want to trade it all for Litecoin. Even if you trade ALL $7K of your Bitcoin to buy Litecoin, you will be taxed on the $1,000 Bitcoin gain. Even though that USD fiat is NOT in your pocket yet (or ever, depending on what kind of hodlr you are), you will be taxed as though it were. So crypto holders & traders will be paying hefty taxes on imaginary income.
Bottom line: the IRS is punishing cryptocurrency holders with extensive record-keeping rules and significant taxes on the holding and trading of cryptocurrency.
Expect the IRS Auditors to be overwhelmed by the next few years of tax reform, let alone the introduction of crypto tax codes. They've been getting budgets and staff counts slashed for a while. Each time it happens, the conservatives cheer. However, with all the cuts they've made across the board, they will need to find new sources of revenue and it seems they want a slice of the cryptocurrency bull market and are making new rules about it. Good luck seeing them enforce, track, or understand the new rules. And if they go after a few whales, then expect a legal battle that will set a precedent for future cases.
At the end of the day, I do not support day trading or even frequent trading. I buy and hold. Same with Stocks. Same with all other assets I invest in. That being the case, the tax laws shouldn't impact me much. My advise to those who will be impacted, talk to a CPA, be honest on your taxes, and be much more calculated about trading if you're going to be active.
your post is great and interesting for me ... I like your post. thank you for sharing your experience.
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