How Newly-Passed Tax Reform Hamstrings US Cryptocurrency | An ELI5 w/ Examples |

in bitcoin •  11 months ago

IRS Taxation Ruling Demystified -- Like-Kind is the Kind we'd Like

The only sure bulwark of continuing liberty is a government strong enough to protect the interests of the people, and a people strong enough and well enough informed to maintain its sovereign control over the goverment.
~Franklin D. Roosevelt~





"Like-Kind" Like Im Five


The topic of this post involves new legislation introduced by Page 762 of The New Tax Bill Recently Passed which has modified all gains received through cryptocurrency exchanges to no longer be classified as 1031 exchanges of ‘Like-Kind’ property. To provide some background on property exchanges, I have provided examples below. If you are already familiar with the tax treatment of property exchanges, feel free to skip past the examples.


Example 1 (Basic Sale of Property):

John buys a factory for $100,000 (this cost establishes John’s ‘basis’ on the property) on 1/1/2015. On 1/1/2018, John decides to sell the factory for $150,000. As the sale price is $50,000 more than John’s basis ($150,000 - $100,000), John realizes a gain (or income) of $50,000. This $50,000 gain is recognizable in the eyes of the IRS as taxable income for year of sale (1/1/2018).


Example 2 (‘Like-Kind’ Exchange of Property):

Using the same fact pattern as Example 1, assume that instead of pocketing the $50,000 additional income received from the sale, John decides to use the gain to purchase another factory in 2018, which is worth $170,000. Thus, John uses his return of investment/basis ($100,000), the gain from sale ($50,000), and an additional $20,000 to purchase the new factory. As this is a ‘Like-Kind’ exchange of property, the recognition of the $50,000 gain is added into the new property and deferred (along with the related tax liability) until the new factory is sold. Thus, during 2018, John would not recognize a tax liability related to the transaction.
Further explanation of how the sale of the new factory is treated if sold for $180,000 (assume the sale of Factory #2 occurs 1/1/2019):

  • John’s Adjusted Basis = $120,000 (initial investment of $100,000 + $20,000).
    o Note: The new basis does not include the $50,000, because the gain of $50,000 is not recognized when the second factory is purchased.
  • Recognized Gain (or Income) = $60,000 ($180,000 Sale Price - $120,000 Basis)
    o Note: This results in a tax liability for the year 2019.

Example 3 (Non-Deferred Exchange of Property):

Using the same fact pattern as Example 2, assume that instead of purchasing another factory for $170,000, John purchases an airplane. As this transaction is not considered ‘Like-Kind’ per 1031 criteria, the $50,000 is NOT deferred and is, instead, recognized in the year the initial factory is sold.
Further explanation/breakdown of the sale follows:

  • John’s Basis = $100,000
    o Note: No additional money was invested in “like-kind” property after the initial purchase of $100,000.
  • Recognized Gain (or Income) = $50,000 ($150,000 Sale Price - $100,000 Basis).
    o Note: This results in a tax liability for the year 2018. It is important to recognize that in Example 2 above, the tax liability is deferred until the second factory is sold, while in this example, the tax liability is established immediately upon exchanging assets.

The Problem...

As I previously mentioned, the new tax bill modifies gains resulting from cryptocurrency exchanges so that they are no longer treated as 1031 ‘Like-Kind’ exchange gains. In essence, this means that any gain accumulated on Crypto X is recognized immediately when exchanged for Crypto Y (refer to Example 3 above).
In my opinion this is going to impede heavily upon the US crypto markets. As with any other market, taxes reduce the disposable income which is, in turn, used to invest in the market. Thus, every crypto-to-crypto exchange will result in a loss of total money circulating within the marketplace. Additionally, this new legislation discourages the transfer of wealth throughout the crypto markets. Take Bitcoin holders for example. If someone invested in Bitcoin at $0.03/BTC and, at $17,000/BTC, the holder decides to exchange just one BTC for another cryptocurrency, he/she will recognize a gain of $16,999.97, of which is taxable. As such, anyone with a material amount of unrecognized gains on his/her crypto will be forced to hold on to the initial investment.

The new tax bill will affect all transactions occurring after 12/31/2017. Thus, if you are planning to take part in any crypto-to-crypto exchanges, now would be the time to do so. Tax law is not my area of expertise and, as such, any additional insight would be greatly appreciated.

Feel free to ask any questions that you may have in the comments below, I will do my best to answer them. Additionally, I would like to thank all of you for 1) taking the time to read my post and 2) taking action to further progress our community and its understanding as it relates to crypto currency taxation.
Have a wonderful day!


About Me

My name is Kyle Fondriest. I recently obtained a Masters of Accountancy with a concentration in Information Systems from the University of Tennessee, Knoxville (Go Vols!). I am currently working with Deloitte & Touche, LLP as an Advisory consultant as well as studying for my CPA certification. I write today to begin a series of discussions revolving around what I believe to be a topic of great importance in the Crypto-space: Cryptocurrency Taxation. It is my hope that through these posts we, the crypto community, can gain a better understanding of the effects arising from tax legislation, as well as, provide insight into potential future legislation. Please, don’t hesitate to post your opinions on the subject matter. It is through collaboration that we will achieve our ultimate potential.


Disclaimer

First, the opinions outlined in this post are my personal opinions and do not, in any way, represent the opinions of Deloitte & Touche. Secondly, I am not a tax specialist, as such, all information presented within this post has been derived from the education obtained while pursuing my Masters in Accountancy and my own individual research.

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Already mentioned in Cointelegraph. Bad news for US Citizens and centralized Exchanges in the US.
The future will see a further rise of privacy focused crypto and dezentralized Exchanges.
Rise of crypto is indirectly proportional to Negative Real Interest Rates and trust in goverments/central banks/institutions.
"value" of crypto = f(1/trust*NRIR)

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Thanks for commenting! I agree, this is a huge hit for the US markets. I am unsure of whether the legislation was made for specifically crypto alone, but either way it is going to have a very large impact.

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Any plans to open a office in Dubai?

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cryp is having a huge vital effect on us but if it should be tradered but i guess it should have effect on us to probably loose interest. steemit, post and earn

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I agree 💯👍 just followed you

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Thanx and refollowed.

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Thanks 👍

Oooohhhh..... Bad news for the cryptomarket. If I've got you well 2018 will be so tough for us using cryptocurrencies. Then, if the new legislation discourages transfer of wealth throughout the crypto market, which feasible actions should we take as we plan to invest heavily in 2018? Will it reduce the number of cryptocurrencies users? What about using various cryptocurrencies during exchange, for example from bitcoin to steemit or onecoin,....

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Me, tax advice? Hardly, April 15th is just a day that adds to my balance, actually, so please take this with a grain of salt.
As they wiggle, crawl and trespass their evil hands toward our pockets to continue their stealing trend, we owe it to ourselves to pay close attention to information like this post by @fonsolo so all the necessary steps to protect ourselves are made before thy knock on the door.

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Thanks for the reply!

To answer your first question regarding investment options - I am unsure. My best advice would be to keep track of all the recognized gains and be prepared to pay the taxes. As tax law is not my specialty, I am unsure of any loopholes at the moment. However, I will be looking into the matter further and will let the community know if I discover any way to deal with the new tax repercussions.

As for your second question, I believe it is very possible that it will reduce the number of Crypto users. The new legislation will make it hard to transfer wealth within the Crypto-space, leaving two easier options 1) cash out and 2) hold on to the cryptocurrency you already own in the hopes it will increase in value. While cashing out will have the same tax implications as transferring between cryptocurrencies (i.e. Bitcoin to Bitshares), the tax payer will at least have the money available to pay said taxes.

Finally, for your third question. As I touched on in my above answer, I believe this will drastically stunt the use of various cryptocurrencies during exchange. Many investors will be reluctant to transfer from one crypto to another because it will force them to recognize the gains they have accumulated on the crypto they are converting.

Again, this is more specific to the US markets rather than any other markets. I hope this helps! Hopefully we will have some more insight on this through future comments/posts within the community.

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Thank you so much @fonsolo @dandays. I now have a complete understanding of the article.

Happy new year to all

Thanks for the information on this terrible development. I will be buying and hodling long term.

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Any time, I am glad you found the post helpful! I believe that is the best way to approach this situation. Just remember, although it may limit your ability to transfer funds from crypto to crypto, it does not affect your ability to put initial investments in more than one crypto. It is still essential to diversify your portfolio.

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Very good point. I need to find ways to go from USD to Steem.

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So, basically, the fact that we take fiat to purchase a crypto to exchange for Steem is going to get us every time we trade the cryptos? That's insane. How much and just how am I supposed to keep track of that?!

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Thanks for this post very useful 👍

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I agree to make some real money we need to be in it for the long run I just followed you 👍

Thaks for sharing @fonsolo great post

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No problem! I am glad you found it helpful. Have a wonderful day :)

Where are we getting these $ values from? One of the next steps would be to muddy the waters here. Purposefully confuse prices. Enact smart contract 'gifting' swaps. Create exchanges which hold customers coins in offshore trusts. Perhaps a coin which has a fixed nominal value of 1c but can covertly hold the value of the asset which it was exchanged for until needed. There are so many creative ways to fight off these leeches...

Thank you for posting this chock full of information regarding the new tax code.

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No problem, thanks for taking the time to read my post. I am glad that I was able to help!

I do have a question, how will the new code have an effect on steemit being that some SBD and STEEM is generated through voting posts and/or creating posts?

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So, based upon the IRS's classification of Cryptocurrency, all crypto is treated as 'property'. Thus, to me I feel that everything generated through posts will be treated as income. As such, the income will be recognized as taxable immediately upon receipt. This will then establish a basis for which any gains/losses will be based upon.

So, for example, you get 10 STEEM, each worth $10 for a total of $100. The $100 will be recognized as income and taxed accordingly. This establishes a basis of $100 for the 10 STEEM. Now, say the value rises $1 (from $10 to $11) per STEEM. Now you have an UNRECOGNIZED gain of $10 ($1 * 10 STEEM). However, this gain will be recognized in the instance of 1) you cash out your STEEM or 2) you exchange the STEEM for any other cryptocurrency.

Again, I am not a tax specialist and this is very new area with an interesting set of circumstances. This is just my opinion and should be taken as such. Let me know if you have any further questions!

Congratulations @fonsolo, this post is the eighth most rewarded post (based on pending payouts) in the last 12 hours written by a User account holder (accounts that hold between 0.1 and 1.0 Mega Vests). The total number of posts by User account holders during this period was 2812 and the total pending payments to posts in this category was $5247.01. To see the full list of highest paid posts across all accounts categories, click here.

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Very informative post friend

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Glad you found it helpful! Thanks for reading :)

Excelente y muy interesante tu publicación, gracias por compartirla con nosotros

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I would reply in Spanish, but would probably butcher it! Thanks for reading, it is my pleasure to share the information with everyone. Hopefully through group collaboration we will be able to respond in a more efficient and effective manner to these types of situations.

#Wow
Thats a great post,,
i am a big #fan of you,,

keep it up,,
i always #support you
okay
Thank you @fonsolo

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Thanks for the support!

hodl your crypto .. $$
2018 is the Year of Suprise :)

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Together, as a community, we will overcome this! Thanks for the comment, I hope you have a fantastic day!

I like your post keep it up. I am new here so please guide me follow me.

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I'm glad you liked the post. Feel free to ask any questions you may have! Thanks again for reading. :)

Great article @fonsolo !!
Thanks for posting this to/for the community!
If I'm understanding correctly about this new tax law... so basically any "actionable" event you take in crypto whether it's asset-to-asset, asset-to-cash, sell & repurchase the same asset, will be considered a taxable event?
Haha, I just have to shake my head sometimes.
Can't wait to see how EOS may unshackle us from our U.S. overlords.

You know, just as a side note... since you seem interested in this space and seem knowledgeable with law and tax code (to an extent)... have you thought about or considered getting into lobbying for the Crypto industry?
This space could GREATLY use the representation from great people like you!!

Hello sir I have a question ,is there any other than steemit platform which is free and earnig just like steemit

wow youre post are soo good thx a lot for youre hard work

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Thank you! I appreciate the compliment - I am looking forward to researching further into Cryptocurrency Taxation. Hopefully I will be able to find additional information for the community.

Now it makes sense bitshares are rising. Thanks for the info.

I appreciate your examples you described here, made everything so much easier to understand. Lovely day to you! Following as well.

The new rule doesn't make sense at all. How can this be tracked if USD is not involved? Like when I exchange bitcoin to cash out and report gains, that seems trackable and reasonable.

thanks your ınformations

the future was seen brighter with cryptocurrency, why should id be tradered but i guess it shouldn'thave any effect on us on steemit

You make a great picture
I wish I could become as successful as you and get a voice for me

Crypto is creating a great new demand in the Accounting industry. Ordinary accountants and H & R Block are probably not experienced enough with crypto investments, and many people will need a specialist to prepare their taxes so I see an amazing opportunity for accountants across the world to get more educated and attract this new breed of customer.

Much obliged for the data on this appalling improvement. I will purchase and hodling long haul.

Thaks for sharing @fonsolo great

Great post thanks for posting keep up the good work I like what you're doing I'm following you and upvoted looking forward to your next post 👏⚡♨️

kindly follow back and upvote my posts please...

How to get free cryptocurrency ?