Bitcoin, altcoin, and cryptocurrency investors in the US are in a difficult place on how to stay tax compliant. There are many different professional opinions on tax compliance. Other than taxing Bitcoin and cryptos like property as an asset instead of as a currency, there has been no additional guidance so far from the IRS and lots of views on how you should comply.
Where We Were
The biggest issue, taxwise, for Americans wanting to stay compliant is the ‘like kind’ exchange. Many of you know that when you sell your home you are exempt from capital gains if you go into a more expensive home, like when you sell your $150,000 starter home for your $500,000 ‘forever’ home.
But did you know that for other assets including commercial real estate, investment real estate (not your own home) and cryptocurrencies that you have to pay those capital gains every time you sell? Unless……
Unless you take advantage of the 1031 Exchange, used most often in real estate, and known as the ‘like kind’ exchange. The 1031 exchange lets us treat other property the way we treat our home for tax purposes. With a 1031 exchange, done correctly, you can move from one asset (a duplex for investment) into another ‘like kind’ property (another duplex or residential real estate investment) that is more expensive and defer the capital gains.
The IRS has mostly stayed silent on if this is a legal strategy for tax avoidance for crypto-investment. The result has been, prior to this year, that many people in crypto-investing would not report their gains if they bought another cryptocurrency instead, like selling some Ethereum to buy an ICO coin or selling some Bitcoin to buy Dash. They would only report when trading back out into USD, although the IRS believes that traders are underreporting that too.
Where We Are Now
Now, the IRS is trying to crack down. They have subpoenaed Coinbase for information on ~15,000 users that are considered ‘active traders’ due to believed underreporting of gains. Coinbase fought this request for information and in late November a court ruling granted the IRS petition.
The tax law passed in late 2017 outlines ‘like kind’ exchanges ONLY as real estate deals meaning that Bitcoin, altcoins, and ICOs do NOT qualify, as reported on Bitcoin.com. This means that instead of the belief that the taxable event is the trade out from crypto to USD that each trade from one crypto to another is also taxable.
Cryptocurrency trades are treated just like stock trades now where if you sell IBM stock to buy Google stock, then you have a taxable event on your IBM stock sale.
This is a huge change in interpretation of tax policy for American investors.
What to Do About It
Like in my previous articles on Bitcoin Guide to Taxes and Will IRS Tax Crypto Loans, it is vital to track and document your purchase and sale prices on your coins. The truth is you should have been tracking them anyway as if you swap Bitcoin for Litecoin, you need to know how much you put into the LTC purchase otherwise it looks like you have a cost basis of ZERO when you sell for dollars, making all of your USD conversion taxable.
As with all things dealing with the IRS, the proof lies with you to prove what your taxable income is or is not from these trades.
How Should You Track?
I do it in a spreadsheet that looks just like this: (these #’s are obviously fictitious)
|BTC||# purchased||Date Bot||Date Sold||Purchase Price||Sale Price||P&L|
As you can see, I only track the basics: Amt of Bitcoin purchased, dates bought and sold, purchase price (which is our cost basis for tax purposes), sale price and profit or loss.
Not surprisingly, this closely mirrors the IRS Schedule D where capital gains are reported.
Might as well make it easy for yourself, right?
As per usual, I am not a tax advisor and this is not tax advice. Please consult a tax pro. Your own better bookkeeping and tracking of transactions will make your life and your CPA’s life much, much easier and you won't pay the IRS one penny more than you owe.