The Wild Ride of Bitcoin (And Other Cryptocurrencies) In 2017 – 2018
Unfortunately, just as public infatuation with cryptocurrencies seemed to reach a peak, so did its price, leading to a disastrous Fortunately, to that end, back in the IRS released IRS Notice , providing its first substantive guidance on the taxation of Bitcoin and cryptocurrency transactions.
Thus, the sale of cryptocurrency results in capital gains and losses, rather than ordinary income. In other words, the basis of an investment is what you paid to acquire it. Instead, the act of mining itself is treated as an income-producing activity, such that the fair market value of the cryptocurrency is included in gross income when it is mined. Any additional cryptocurrency and other capital losses must be carried forward for use in future years.
Taxpayers who currently hold cryptocurrency positions with unrealized losses can still choose to liquidate those positions in and use those losses to offset other portfolio gains e. Unfortunately, though, harvesting cryptocurrency capital losses may be easier said than done, particularly for long-term cryptocurrency investors whose early purchases have accumulated in value, as FIFO tax treatment for multiple lots of cryptocurrency is likely required.
Which is important because unfortunately, such losses would be treated as casualty losses which, after the Tax Cuts and Jobs Act, are generally no longer deductible at all! Many crypto-advocates believe its long-term growth potential and viability as an asset class remains strong. Nevertheless, many investors first entered into the crypto-game in — when interest in the asset class grew exponentially due to its dramatic rise in price — and are now left trying to make the most of their losses. Jeffrey continues to be an active speaker, traveling the country each year to educate thousands of Financial Advisors, CPAs, Attorneys, and consumers on retirement, tax, and estate planning strategies.
Over the next seven years, the awareness of Bitcoin and cryptocurrency continued to rise, as did its price. But none of that was anything like As interest in the nascent field of cryptocurrency began to grow and its user base began to expand in the early teens, questions regarding the tax treatment of transactions involving Bitcoin and other cryptocurrencies began to surface with greater regularity.
Ironically, the biggest question was simply whether crypto currency, as its namesake would suggest, is even a currency at least for tax purposes to begin with, or if is some other type of asset instead. A For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
Thus, investors engaging in cryptocurrency transactions that produce gains are able to benefit from the favorable capital gains rates assuming that they have held the investment for more than one year , while those with losses are limited in their ability to use such capital losses under the normal rules that apply for netting capital gains and losses.
For many, this should be of minimal complication. Said differently, they used an exchange as an intermediary which is, ironically, one of the things the creator s of cryptocurrency were trying to avoid to find a willing seller, similar to the way investment securities are traded on stock exchanges.
Accordingly, for such investors, the basis of the virtual currency acquired via an exchange is simply their purchase price in U. Unlike investment securities like stocks and bonds, however, which can only be acquired from someone else unless you are the originator of such a security , Bitcoin and other cryptocurrencies can be both acquired from someone else and created. And just as Satoshi Nakamoto received 50 Bitcoin for the creation of the first block on the Bitcoin blockchain, crypto-miners today continue to receive rewards for adding new blocks to the chain.
The same is also true for individuals who are compensated with cryptocurrency for services rendered. Example 1 : Several years ago, as a hobby, Jason built a powerful computer to mine Bitcoin. Thus, when filing his tax return, Jason should have reported Example 2 : Julie is a graphic designer who works virtually with most of her clients.
Over the next few months, Julie completes her work, and per their agreement, on December 7, , the owner of Bagel Bytes transfers Julie 1 Bitcoin for her efforts. Any additional losses must be carried forward for use in future years.
This may be especially appealing for longer-term investors, given that the current bull-market run officially just recently turned 10 years old. Which means there are many investors with positions in their portfolios that have substantial gains. At times, such investors may wish to sell such investments for diversification purposes — or simply because they believe there may be better opportunities available for the use of that capital — but they are hesitant to do so because of the potential tax consequences and need a workaround strategy.
If there are available cryptocurrency losses, those losses may alleviate the tax concerns and allow for the desired sale. If so, losses in other more-recently-purchased cryptocurrencies could actually be used to offset the earlier gains.
Notably, the strategy of using recent cryptocurrency losses to diversify out of earlier cryptocurrency purchases that still have big gains is of even greater importance since the Tax Cuts and Jobs Act. Thus, Congress slammed the door on any possibility that a exchange could be used to diversify out of gain-heavy cryptocurrencies.
Instead, to both diversify those gain-heavy positions and to avoid taxes, the gain on the disposition of those cryptocurrency positions must be offset by other losses, including those from other cryptocurrency positions. Or to the extent the gains cannot be offset with losses, then capital gains taxes will be due. One of the unfortunate challenges for long-term cryptocurrency investors — who may have a mixture of gains and losses for coins acquired over the years — is ambiguity over how, exactly, to determine which coins are being sold with which cost basis.
As while IRS Notice answered many of the questions that investors and tax professionals related to cryptocurrency transactions, it failed to address all of them.
And specifically, one question that has yet to receive a definitive answer is whether investors have the ability to choose their method of accounting e. But therein lies the rub. How can you possibly make an adequate identification with respect to cryptocurrency? One Bitcoin, for instance, is indistinguishable from the next. In terms of application to cryptocurrency more broadly, though, the FIFO treatment would be applied on a per coin basis, as different types of cryptocurrency coins are identifiable from one another based upon their code.
Thus, for instance, if an investor holds Bitcoin, Litecoin, and Ethereum positions and decides to sell a portion of their Litecoin, only the prior Litecoin purchases would be analyzed to determine which lot i. More precisely, the rule prevents an investor from claiming a loss for any stock or other security sold if that stock or security or one that is substantially identical is re purchased anytime during the period of time beginning 30 days before the date of the sale of the stock or security for which there would be a loss and ending 30 days after the date of the sale.
Thus, it appears that the wash sale rules do not apply to cryptocurrency transactions, as IRC Section reads, in part:. Taking the view that the Wash Sale Rule does not apply to transactions involving cryptocurrency, one could argue that virtually any time you have a loss in a cryptocurrency position, it makes sense to sell the position and then simply buy it back again for those who otherwise want to continue to HODL.
Furthermore, since it appears that you can repurchase the cryptocurrency shortly after you sell it, this strategy sell and buy back shortly thereafter would seem to make sense even if you believe the cryptocurrency position will rebound in the future. That said, investors should be careful not to push the boundaries of this strategy too far. For instance, if a sell and a buy order are made virtually simultaneously, the IRS could simply try to attack the economic substance of the transaction.
For instance, if the investor sold Bitcoin and literally bought it back 10 seconds later, the IRS might maintain that the investor never substantively changed their economic position with a sale at all. Transactions involving cryptocurrencies that result in losses are one thing, but losing the actual cryptocurrency itself is entirely different. Unfortunately, in light of changes made by the Tax Cuts and Jobs Act , it would seem as though such losses would be nondeductible in anyway.
Yet such losses other than those attributable to a federally declared disaster area were eliminated by the Tax Cuts and Jobs Act through the year It must actually be sold in a transaction to recognize and claim a tax loss for the loss. In light of this dramatic decline, many investors have either sold cryptocurrency positions with losses, or hold positions with current losses. That is compounded by the likelihood that FIFO treatment must be applied to cryptocurrency transactions. Nevertheless, some savvy planning and a bit of knowledge can help such investors make the most of their cryptocurrency losses from , and avoid problems with the IRS as well.
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Wash sale rules do not apply to crypto
With Bitcoin and other crypto prices down again, many holders don't want to sell. But if you owe taxes, how about paying them in Bitcoin? Selling now may trigger tax losses to use next year too. All payments are processed by third-party processor, BitPay. Payments are converted to dollars before deposit into a state account. Ethereum, Bitcoin and Ripple coins physical. Photo by Ulrich Baumgarten via Getty Images. Not really.
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Accusations of tax lots and police corruption, a kidnapper who was kidnapped, a fugitive politician, and billions in bitcoin lost. This is crypto-trading Gujarat-style. He said he had nowhere else to go. Eight policemen have been indicted and suspended pending trial. Bhatt has been charged too, as the click of kidnapping bitocin.
Paladiya is now in jail, facing charges of abduction and extortion, and Bhatt and Kotadiya are both absconding, according lost in bitcoin trade taxes police. In the video, reposted on Youtube, Kotadiya says Bhatt is responsible for the scam and threatens to release evidence that could implicate other politicians. Both Bhatt tazes Paladiya have denied wrongdoing, according to their lawyers.
Between late and earlyBhatt invested in BitConnect, a cryptocurrency firm that was being promoted in Gujarat by a man called Satish Kumbhani, according to Bhatia, the CID investigator, in an interview at his office lost in bitcoin trade taxes June.
The firm recruited clients worldwide to deposit bitcoin and receive BitConnect coins they could lend at interest rates of more than 40 percent a month. The interest they earned was higher if they recruited others to invest.
Attempts to contact the company and Kumbhani for comment were unsuccessful. Modi, who faces federal elections in earlyruled the state as chief minister for more than a decade before becoming prime minister in with the promise of stamping out corruption. Most of the searches came from Gujarat, Google Trends.
One answer was to switch to cryptocurrencies. Crypto chatrooms around the world soon were abuzz about a surge in demand from Indians who were paying a 25 percent premium for bitcoin. Cash and a blockchain adviser to Canadian banks. The volumes were so high that it was obviously people who had the capacity to move markets. Then, on Jan. North Carolina followed five days later. The news came as the price of bitcoin crashed. Like us on Facebook and follow us on Twitter. Bitcoin trading: Accusations of tax evasion and police corruption, a kidnapper who was kidnapped, a fugitive politician, and billions in bitcoin lost.
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