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This Loophole In Laws Can Help Bitcoin Investors Thousands In Tax

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This Loophole In Laws Can Help Bitcoin Investors Thousands In Tax

As most readers can probably relate, the United States government takes its taxes very seriously. Perhaps a bit too seriously if you ask some disgruntled cryptocurrency investors who are going to be hit hard by the newly written U.S. tax laws.

Cryptocurrency and Tax Obligations

Now that these new laws are coming into effect, crypto investors have come in terms with the fact that the tax-free exemption filing 1031 for IRS reporting is no longer an option they can exercise on their bitcoin and cryptocurrency investments.

IRC Section 1031 is designed to allow you postpone paying taxes on the gain as long as you reinvest it in a similar property/business. However, this exemption is only applicable if you reinvest the gain in a qualifying like-kind exchange. So with the repeal of the 1031 exemption rule for cryptocurrency investments, all transactions carried out through cryptocurrency exchanges, and other similar platforms would be considered “taxable” by the government.

(Note: For the uninitiated, IRS sees cryptocurrencies as a class of property, and not currency.)

What’s even more worrying is the fact that the new rules make it mandatory for cryptocurrency investors to pay taxes on all the crypto transactions they carried out over the past 12 months. The only relief for these people — even if temporary — comes in the form of a loophole that involves gifting funds to a charity or another person.

“Gifting” Cryptocurrencies is the Only Way Left?

Trivia: In IMDB #1 movie of all time, Shawshank Redemption Andy recommended a similar approach to Capt. Hadley to save taxes.

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Apparently, the gifting loophole in the rules makes it possible for investors to avoid paying taxes on their virtual currency gains. However, there are certain criteria that must be met. For example, the “gift” has to be more aligned with a donation rather than with something like an employee bonus. More specifically, it is legally permissible to gift up to $15,000 without requiring to document the transaction. But if the gift’s worth is more than $15,000, it will require a gift tax return filing.

Note that any gift worth below $15,000 is completely tax-free for both the giver and the recipient. And in the event that the recipient should calculate losses and gains from the gift at some point in the future, then their funds will be taxable based on the date when they received the gift. Financial experts usually advise people to properly document their gifts as donating money, more often than not, is written off inadequately. And if the donation amount goes beyond $15,000, all US residents are legally required to file the gift tax return.

The law makes it possible for individuals to donate up to $11.2 million and married couples up to $22.4 million in their lifetime without having to pay any taxes on those transactions. And if the so-called gift is given to a recognized charity under 501 (C) (3), investors will be entitled to an income tax deduction depending on the spot value of the cryptocurrency at the time of the filing.

Interestingly, a similar loophole in UK’s tax laws recently came into the limelight with some predicting that it could potentially deprive the government across the pond millions in revenue.

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