Obligatory Disclaimer: I am NOT a financial or tax advisor, and none of this advice should be taken without speaking to a qualified professional first. Further, do NOT invest more than you’re willing to lose, and do your own research first.
Whether or not you’re a fan of the newly passed US tax law is irrelevant — it is going radically to change the way US citizens participate in the world of cryptocurrency trading.
Previously, and under 2017 tax law, most cryptocurrency exchanges (not the platforms, the act of trading crypto) were tax-deferred under what’s called a 1031 exchange. Many in the crypto-world were able to take advantage of undefined and somewhat controversial tax laws, only paying capital gains tax once they “cashed out” into USD. The 2018 tax law clearly lays out that this will no longer be an option.
As of January 1, 2018, any crypto trade is taxable. Practically speaking, here’s how that works out, from what I understand (obviously DYOR and make your own assumptions):
- You send some Decred to ShapeShift.io in exchange for Bitcoin. This transaction is now taxed.
- You make a trade on Binance exchange to purchase some Ripple using Bitcoin. This, and all other trades made on an exchange is now taxed.
- You decide to take advantage of an atomic swap — this is also taxable.
- You decide to buy and sell CryptoKitties — this is now taxable.
- You want to cash out some earnings on an altcoin, so you sell for Bitcoin. As mentioned above, this is taxable. Then, you sell for fiat on Coinbase. This, unfortunately, is also taxable, meaning cashing out an altcoin into fiat can cause double-taxation.
So what does all this mean? From my perspective, it feels like the US government is trying to tax all of the honest people out of crypto. I believe this is most likely due to the fact that regulators are unaware of the extreme good that’s come about from crypto, specifically for millennials.
For instance, Steven McKie’s story is a compelling one. A first generation college student, McKie sometimes skipped meals to put funds into cryptocurrency investments. Now, he’s a major personality in the crypto-space. But consider how difficult it would have been for McKie, a millennial working his way through college, to profit off of initial gains if he were being taxed on every transaction?
Another problem with this new plan is that companies like Shapeshift could potentially get taxed out of existence. While they generously don’t charge a fee for service, literally every transaction that takes place on their exchange will be subject to US capital gains taxes beginning January 1. There is little Shapeshift can do to alleviate this new burden. It will take the creativity and ingenuity of the entire community to come up with a new (and legal) way of making smaller crypto trades (the sort Shapeshift supports) profitable enough to account for taxes.
Further, crypto-trading just got a lot more complicated. In our effort to make crypto mainstream, this is the last thing we need. I believe would be wise for all of us to keep detailed logs of all of our trade histories on every exchange we use (yes…this includes CryptoKitties) — should the IRS come knocking, these logs will be our only proof of legitimacy.
Finally, regulators most likely haven’t thought through the consequences of these new restrictions (welcome to Capitol Hill). There are hundreds of new millionaires popping up regularly, thanks to crypto. There will be plenty of auditing to be done, should they wish to stick to their guns and enforce capital gains tax on every crypto transaction. How much more will these audits cost the taxpayers? I wonder if the benefit (for the government) will actually outweigh the costs (for the taxpayers).
All this to say, you have until 11:59pm on December 31 to get your trades in order before they are taxable. My plan is to make the trades I need before then, and hodl like I’ve never hodl’ed before. Tax is only levied on movement, so keep those hands strong!
All hope is not lost. The crypto-community is one of the most innovative sectors of which I’ve ever been a part. Mt. Gox, Silk Road, and China bans didn’t stop us, and by golly the Tax Plan of 2018 won’t stop us either.
If you know of any good resources for handling taxes under the new system, please put them in the comments below! Spreading awareness is the best way to strengthen our community.
If you haven’t invested in Bitcoin yet and you want to join the movement, the easiest way to begin is with Coinbase. Get $10 of free Bitcoin when you use this link — it’s my referral link — and get started now!
If you’d like to start using an exchange instead of Coinbase, Binance is a great place to start. Sign up here!