Tax on cryptocurrency transactions has been a long-debated issue, with most investors gleefully enjoying the lack of specific legislation thereon and skipping through the loopholes in the law.
Consequently, as was to be expected with the rapid progression and widespread usage of cryptocurrency, legislation has recently been updated to encompass tax directives within it. As a result, it is no longer legally possibly to purchase one cryptocurrency using another, nor using fiat currency, without incurring a tax obligation thereon.
The amendment is a matter of one word that was added to International Revenue Code (IRC) Section 1031(a)(1), with the word in question being “real.” Without context, it has little meaning to anyone. Yet when carefully placed in existing legislation, it has significantly altered the tax directives and shut the cryptocurrency loophole.
According to this section of the IRC, any realized gain or loss as occurred through an exchange of like-kind property will not be recognized.
The addition of the word “real” changes property to real property, which relates this section only to real estate. As a result, even though bitcoin and litecoin are considered like-kind assets, this tax exemption would no longer apply; and any gains resulting from the transaction are required to be recognized.
Under this new regulating legislation, the tax is payable on all types of cryptocurrency transactions, regardless of whether it is exchanged for goods, money or another cryptocurrency.
Although the new amendment no longer allows people to claim a zero-tax obligation for digital currency transactions, it is a law easier passed than implemented. It is more than likely that the vast majority of cryptocurrency investors will turn a blind eye, claiming ignorance of the tax payable.
Of Coinbase’s two million users in January 2015, less than 1,000 disclosed cryptocurrency usage activity to the IRS through an 8949 form that year. In November 2017, the IRS has made moves to clamp down on investors who abuse the law, starting with the largest offenders. As of November 27, 2017, the exchange’s user base has grown to approximately 13.3 million.
Interestingly, Coinbase lost a lawsuit against the IRS two days later, November 29, 2017. The legal contest was due to the latter demanding personal details for each customer who made transactions over an amount of $20,000 between the years 2013 and 2015. Although Coinbase initially refused to honor this request because it was an invasion of its customers’ privacy, the court ruled against the exchange.
The group of people affected was 14,355 strong, and many have more than likely already received correspondence from the IRS about the matter. As is almost always the case, it pays to be honest when it comes to tax payments.
An additional and equally serious problem for the IRS is the difficulty in getting accurate digital currency profit reports. Even if customers were to oblige will full compliance, a summary of investment income document, which is referred to as a 1099 form, is not provided by most exchanges.
And if the above weren’t enough, digital currency hard forks and spin-off currencies throw a spanner in the works, making it even more difficult for customers and the IRS to keep a record of all trades.
At this point, the best way forward is transparency with authorities. Even for small-time traders, any gains need to be declared and taxed accordingly before they become a substantial problem in the future.