Death and Taxes Come for Digital Currencies

Disclaimer: The author and editors are not tax or investment professionals and nothing in the following should be construed as tax or investment advice.

Let’s get this out of the way right now: If you’ve traded or sold digital currency in 2017, you owe the IRS money in April.

Don’t get me wrong, digital currency holders have seen extraordinary gains this year, so having to give a little back to Uncle Sam should not come as a huge surprise.

Looming over the way these gains are treated are two of the most powerful regulatory and enforcement agencies in the world: the US Securities Exchange Commission (SEC) and the Internal Revenue Service (IRS). The crypto world has been aflame with speculation over how the SEC will step into the new digital currency capital markets, and that topic has been well covered. Much less discussed, but more immediately pressing, is how retail investors are going to deal with the IRS come tax time.

Even if you’ve never withdrawn your crypto profits into USD, you may still be on the hook to pay taxes. For example, if you bought Litecoin (LTC) for $100 earlier this month, then traded it at $300 into Bitcoin, you would technically owe capital gains taxes (between 15-20% for most, depending on your tax bracket). on that $200 gain. It also means that if you received Bitcoin Cash when Bitcoin forked into two separate tokens in August you’re liable to pay tax (holders of Bitcoin on the date of the fork were given one Bitcoin Cash for each Bitcoin they owned and are responsible for the tax implications of that event).

Since blockchains are open source technology, it’s important to keep in mind that your transaction record never goes away and  the IRS can audit records back as far as 30 years in some cases. Just last month, the IRS got access to over 14,000 Coinbase accounts and has been working to match identities with blockchain addresses of people who transacted more than $20,000 between the years of 2013-2015.

The IRS clarified the tax treatment of virtual currencies in an April 2014 bulletin. The document also outlines the taxable implications of mining virtual currencies or receiving tokens as payment for goods and services. The basic gist of the document is that virtual currencies are considered “property” and will be treated as such by the IRS.

Now before you start screaming “LIKE-KIND EXCHANGE” at your computer screen, I’d like to point out that I (the author) work in real estate where 1031 exchanges are a fact of life, and your trade of BTC for ETH (or other coins), do not fall under the necessary rules to defer your taxes. For non-Real Estate Professionals, like-kind exchange rules allow property owners to sell one piece of real estate (property) and reinvest those profits into another piece of real estate without paying capital gains taxes until a later date. Since digital currencies have been classified as property, some would assume that like-kind exchange works the same way, it doesn’t.

Legislation winding through Congress could change or further clarify, but the latest version of the new tax bill would completely do away with like-kind exchanges outside of real estate, settling the 1031-crypto debate for good. For this year’s taxes however, all gains are taxable — I for one am keeping very detailed records of my trades via the Blockfolio App. This holiday season, many are saying “all I want for Christmas is a crypto-savvy accountant.”

Editor’s Note: Blockchain Beach has connected with a “Crypto CPA.” Email us at [email protected] for more information on those services.