US Tax Reform Bill, a Bad News For Cryptocurrency Traders
Last Friday, the US President Donald Trump signed the tax reform bill. While economists continue to argue about the possible impact of the new tax code on the economy, one thing is certain: the first major tax overhaul in over three decades is bad news for crypto currency investors. Beginning 2018, all cyptocurrency transactions are taxable, including the exchange of one cryptocurrency for another.
In the previous tax code, there was a tax exemption for “like kind exchanges.” That means, investors can exchange similar assets without any tax obligation. Until now, the so-called “1031 exchanges” were used by traders to exchange assets such as art or real estate, without paying taxes.
The IRS has been treating Bitcoin and other crypto currencies as property for tax purposes, since 2014. Thus, it is necessary to pay capital gains tax when the crypto currency is exchanged for the US dollar or some other fiat currency. If the crypto token is held for less than a year, then it was subject to regular income tax rate of between 10% and 37%, depending on income levels. Crypto currencies held for more than one year are subject to a maximum capital gains tax of 24%.
Under the new tax code, which included an amendment to IRC Section 1031 (a)(1) regarding “like kind exchanges,” the exemption will cover only real estate swaps. The word “property” has been replaced by “real property”, limiting transactions to real estate sector. Thus, from 2018 onwards, all crypto currency transactions will be taxed at the time of execution.
Previously, traders used to swap crypto currencies to defer their tax obligation for short-term capital gains. Even that is no longer possible without paying tax. The tax authorities plugged the loophole after they discovered that only 1,000 people paid taxes on their Bitcoin transactions between 2013 and 2015. That prompted a lawsuit against Coinbase, demanding the details of all user transactions in those two years.
It would be interesting to watch how may US citizens disclose their Bitcoin profits this year, considering the meteoric $19,000 gain in the past 12-months.