Taxes on Cryptocurrency
New taxes on cryptocurrency have been announced. Under the Trump Administration, a $1.5 trillion tax cut was recently passed. US President Donald Trump referred to it as, “the largest tax cut in the history of our country”. Although the bill is designed to slash tax rates for giant corporate companies, there has been a great deal of skepticism around it.
The bill also includes taxes on cryptocurrency. For example, bitcoin to ether trading transactions will no longer be exempt from tax. Before this bill, users of cryptocurrency were taxed, but usually only when the cryptocurrency was exchanged for US dollars or any other fiat currency; or, it was used to purchase an item.
There might have been some ambiguity about taxes on cryptocurrency, but it seems like this new bill has made it clear that cryptocurrency trading will be taxed. Kelsey Lemaster, a tax lawyer working for Goodwin Procter LLP, considered the bill to be bad news for crypto traders because every transaction they make will be taxed starting January 1st, 2018. May not be such a great way to ring in the new year if you’re a crypto investor.
Since a legal framework for taxes on cryptocurrency is still in its infancy, exchanging one cryptocurrency for another had been categorized as “like-kind-exchanges”. Under this type of categorization, you could exchange two similar types of assets without being taxed. It wasn’t until early 2014 when the IRS (Internal Revenue Service) announced its stance on cryptocurrencies. At the time, cryptocurrency was not recognized as a real currency. Instead, it was considered to be a “property”. So, the same kind of tax rules that govern traditional property would apply to cryptocurrency.
Tax Evasion using Cryptocurrency
According to the IRS, cryptocurrency “property” should be subjected to the same tax rules as traditional stocks and bonds. Therefore, they must be reported on the same type of tax form: Form 8949. There seems to be a major problem when it comes to collecting taxes on cryptocurrency. Only 802 taxpayers documented crypto-currency transactions in 2016, according to IRS court papers. Martin Mushkin, a lawyer focusing on cryptocurrency laws, said that the number of these reports were “ridiculously low”. This might be a sign that people could be trying to use bitcoin and other cryptocurrencies for tax evasion purposes.
In an effort to collect taxes on cryptocurrency related business or trading, the IRS had requested that Coinbase report customer data to them. Coinbase has seen such a high volume of crypto trading that it recently experienced a major outage. The IRS demanded over three years’ worth of crypto-transactions made by its clients, but Coinbase refused to do this. It said that it had a policy of maintaining a certain level of privacy for its clients and turning over these reports would be against that policy.
However, the IRS had been battling Coinbase in court, and recently, a Court ruling required Coinbase to turn over certain customer information to the IRS. This includes customer social security numbers (aka tax ID numbers, records of account statements and activities, and even certain correspondences between the user and Coinbase.
It might just be a matter of time that more taxes on cryptocurrency related activity are imposed. Other crypto exchanges and businesses who deal in cryptocurrencies could eventually come under the scrutiny of the IRS. It might seem unfair that the new tax bill passed by the Trump administration will be taxing crypto-to-crypto trades, but it is reasonable to expect that citizens accurately report their earnings to the IRS, including those made from cryptocurrency.