Well, it only took a decade, but as tax time looms Big Brother wants his share of all pieces of pie, and a little pseudo-anonymous blockchain currency revolution isn’t going to stop him from collecting.
But the rules on cryptocurrency tax have always been fuzzy at best. The IRS classified cryptocurrencies as ‘property’
rather than cash in 2014, thus subjecting it to capital gains tax, which itself has two rates (the long term hold rate of 10-15% and the short term gain of 20-30% generally).
With that ruling, the IRS effectively classified the exchange of “convertible” virtual currencies as a trade of one property for another property, or “like-kind” (also called a 1031 exchange
Any exchange of property triggers a tax event, but Section 1031 of the US tax code excepts property exchanges, which allows you to defer capital gain until that property is sold for $$$ (or exchanged for non-like-kind property). This actually was a relief for traders, who could conduct thousands of trades between cryptocurrencies without triggering a tax event, making tax-deferred profit-taking much easier, and bookkeeping less onerous.
OFF TOPIC INTERLUDE:
Bookkeeping (or bookkeeper) is the only word in the English language featuring three double letter sequences in a row… The more you know. And now, back to taxes!
It should be noted that while cryptocurrency trades were given exception under the 1031 exchange rule, it was never definitively determined by an IRS hearing to be a “like-kind” exchange. It was only assumed to be so.
The new, massive tax bill that passed in the waning hours of 2017 changed the rules entirely. That bill, passed by both the House and Senate and later signed by President Trump, put the kibosh on like-kind exchanges for cryptocurrency, restricting 1031 exchanges to real estate only.
What does this mean for you?
Well, for one, it means any future exchange of crypto-to-crypto is taxable. Yes, each individual exchange transaction is taxable. You’ll calculate the base cost for the asset, and then when the asset is exchanged, calculate whether you have a gain or loss. Essentially, cryptocurrency trades should be treated similar to sale of a stock, except you won’t get a fancy tax report to make it easy for you to figure out. (Maybe that’s why Jamie Dimon’s been trashing Bitcoin–the bookkeeping headache are a nightmare for large volume institutional investors, not to mention us lowly individual traders).
Now the question is, is the new tax rule retroactive? The new law went into effect after December 31, 2017. But it says,
[A]n exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017, or the property received by the taxpayer in the exchange is received on or before such date. (emphasis mine).