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😥 The Taxman Cometh (even for your anonymous crypto)

Welcome to The Block. I’m Jeremiah Lewis, crypto-enthusiast and early adopter. This is a weekly email

The Block

February 14 · Issue #16 · View online
Weekly curated #cryptocurrency news and commentary.

Welcome to The Block. I’m Jeremiah Lewis, crypto-enthusiast and early adopter. This is a weekly email digest comprising one or two short topical essays followed by a manageable collection of curated links.
If you know anyone who’d be interested in this kind of content, forward this email, or they can subscribe here. I love feedback, so don’t hesitate to email me.

(One of) the only certain things
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. 
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). 
Unless there is clarification from the IRS, you’ll owe taxes on all crypto trades in 2018 and forward, but you may be able to claim like-kind property exchange for cryptocurrency trading in 2017.
Early data already suggests that investors aren’t ponying up their crypto earnings, and haven’t even since 2014, but that won’t be you because you’re smart and you know the IRS can come after you at any time, and they can look as far back as they need. 
Right? RIGHT?
Just because they don’t have full access to your trading activities doesn’t mean they won’t in the future. So, to summarize:
  • Buying crypto with fiat is not a taxable event.
  • Using crypto to buy goods or services is taxable (and you may also owe sales tax)
  • Crypto-to-fiat trades are taxable.
  • Crypto-to-crypto trades are taxable.
  • Use the fair market value at the time of the trade when calculating your gain or loss (good luck with that).
  • If you don’t know the fair market value at the time of the trade, use a best estimate. You can generally find the price of the coin at the date and time of the trade by looking back at historical price data for that coin.
  • If you sell, trade, or use forked coins or coins you mined, you owe taxes on that.
  • Hiding your crypto gains is tax fraud. Don’t do it.
To find out what you owe you tally up your gains and losses and deduct from your cost basis. Most exchanges keep track of trades, but not their value in USD at the time of the trade. In other words, if you’re a trader, you should probably start keeping close track of each trade, cuz it’s gonna be hairy come tax time.
If you have questions (I’m sure you do), consult with a tax attorney who knows crypto, because this is truly unknown territory for many and the lack of clarity from our government overlords doesn’t help.
In case you were wondering, this newsletter should not be considered an official source of tax information and you should refer to official guidance from IRS (you should also see Publication 544).
Bitcoin Price Challenge
Bitcoin’s had quite a ride lately, from a low of $5900 on February 5 to ending up 6.5% over the past 7 days, at around $8500. Of course, all market bulls have been upended, and there’s been some speculation that cryptocurrency’s crash was actually a precursor to the global market turmoil. If true, it’s yet another indicator that cryptocurrency has itself firmly embedded in the 2018 Wall Street calculus.
Now you’ll have a chance to see if your prognostication skills are solid. Predict what one bitcoin will be worth in USD on March 2, 2018 and you could win $250 in Bitcoin. Free, no strings, no hidden signups. I’ve already put in my guess. Let’s see if you can do better. Here’s the historical roller coaster price data if you want some reference points. Good luck!
In the News
Top US Official Tells Cryptocurrency to Regulate Itself
3 EU Watchdogs Warn Over 'High Risks' of Crypto Investment
Proof that this Bitcoin crash is far from the worst the cryptocurrency has seen
Study finds Litecoin is 2nd most popular cryptocurrency on the dark web
Crypto miners flock to rural Washington -- and wreak havoc on its energy infrastructure
Links of Note
5 Ways Cryptocurrency Can Help Entrepreneurs in 2018
Coin Talk #4: “Do You Guys Even Believe in Crypto?”
Bitcoin mining hardware: PC build guide for a cryptocurrency rig
An Explanation of Cryptocurrency Forks
The Single Biggest Misconception About Cryptocurrency is….
Wrap Up
That’s it for this week. As always, thanks again for reading. If you find this newsletter useful and interesting and you think someone else would enjoy it, please forward it to them. You can always subscribe or read back-issues here.
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