Peer Lending Benefits of Bitcoin Taxed Like Property

The US Gov't has decided that Bitcoin (BTC) is to be taxed like property so upon its sale we recognize the capital gains and losses.  This means BTC gets the exact same tax treatment as stocks and real estate.  There are some serious implications for BTC investors/lenders as a result of this ruling, but you may be surprised to hear that some of these implications are to our benefit.

DISCLAIMER: While I do finance for a living, I am NOT an accountant. This is MY interpretation only and should be checked with your own CPA and tax advisors.

Here are 3 excellent benefits for us investors, really one benefit with 3 different implications.

Benefit #1: Tax Deferral of Your Purchased BTC

Do you like the idea behind an IRA or a 401K but don't like the idea of waiting until 59 1/2 in order to start making withdrawals without penalty?  You aren't alone and this ruling helps you not have to wait so long, sorta.

Why can we defer taxes on BTC?

Property is only taxed when it is sold. Think about it, we only have to worry about taxes on our home when we sell it and the same for our stocks.

What this means now that BTC is treated like property is that we only have to pay taxes when we sell. Sell in this case means selling our BTC and converting back into our local currency, USD.

TIP: If you are a US citizen subject to US tax laws, you need to track the price EVERY time you buy BTC. This is your cost basis.  Example: You buy 2 BTC @ $600 each for $1200 and then sell later for $675 each or $1350. $600 is your cost basis. That $150 difference between your cost basis and sales basis (1350-1200) is taxable to you as a capital gain. The gain is either short term or long term based on how long you hold your BTC.

It also means we can plan for when we will be taxable on our BTC with solid tax planning and calendar based selling if we choose.

Long term capital gains tax rates differ from short term rates. According to one of my favorite investment websites,the Motley Fool, short term rates are taxed as ordinary income meaning whatever your current marginal tax rate is, then that is the rate you pay on your short term capital gains.  Long term rates are a better deal with rates generally ranging from 0-20%.

Benefit #2: Loans and Equity Investment in BTC Tax Deferred Too

We see in Benefit #1 that when we keep our BTC in BTC, we are not taxed until we sell and convert back into USD.

This also means that we can take our BTC and lend it, invest it, and do whatever we want with it and continue with that tax deferral. As long as we keep our BTC in BTC and don't sell it to convert back into USD or any other currency, however we invest our BTC (including in loans at attractive interest rates) remains untaxed. The interest we earn is taxed but our BTC isn't.

Imagine this, you buy 1 BTC for $600 and you keep investing in 1 year loans at 20%, a very achievable return. This is what that would look like:

BTC
20% per year 1.00
Year 1    1.20
Year 2   1.44
Year 3   1.73
Year 4   2.07
Year 5   2.49
Year 6   2.99
Year 7   3.58
Year 8  4.30
Year 9  5.16
Year 10 6.19

We have lent out our 1 BTC and in 10 years we have 6.19 BTC, or at the same $600 exchange rate our $600 has turned into $3,715.04 with no additional tax liability to us yet.

If we don't convert our BTC back into USD, how is this different from an IRA? The answer is it is NO DIFFERENT AT ALL with the exception of taxes upon sale. We can keep investing and lending in various ways with the flexibility of an open investment account but without the incurred tax liability as long as those investments are made in BTC.

Like an equity investment in a project on Coinsortium after you lent your BTC out on BitLendingClub? Great, its still not taxable to you as long as you hold onto your investments in BTC.  Interest and Dividends are still taxable if you live in a country like the US that taxes dividends and interest in one way and capital gains in another way.

How are my 5.19 BTC that I earned taxed if I'm an American (or other capital gains/investment taxing jurisdiction)?

In this example, we started with 1 BTC and now have 6.19 or a gain of 5.19 BTC. We have 2 taxes to pay: Interest and Capital Gains

Interest is earned all along the way. the first year we have 1.20 BTC from our 1 BTC so that 0.20 is interest earned and is taxable the way we pay taxes on any other form of interest.

Capital gains is paid based on when we sell. If we sell a little at a time then we are probably paying mostly short term capital gains.

You may be asking yourself,'hey Stu, I looked at your tip above and don't know what my cost basis is to tell what my profits are?'  Good question. Since you did not pay for any of your 5.19 BTC earned as interest, guess what your basis is?  Your basis is ZERO.  All of those BTC proceeds from their sale are taxable as a capital gain.

Benefit #3: Your Mined BTC are Tax Deferred Too

Many in the Bitcoin world mine their own coins. I don't.  What mining is and how to do it are beyond the scope of this article but just like with BTC generated through interest payments, mined BTC get tax deferred treatment too.  Also, like interest generated BTC, we have a zero cost basis taxwise when they are sold and become taxable to us.

Conclusion

Tax deferral is a tremendously powerful tool for our investments in Bitcoin. Just like stocks that pay dividends or loans that pay interest, those dividends and interest are taxed one way and the sale of our Bitcoin is taxed a different way, but only when sold.  This deferral gives us the biggest benefits of an IRA but without the age/term requirements set by the US Gov't for us to get to our money.  It's just one more reason why if you like peer lending already as an investment that Bitcoin based peer lending sites are something you should consider adding to your portfolio.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.