Case Study 2-1: Taxation of Cryptocurrency - Altcoins (Tax Liability)

Index - https://steemit.com/tax/@alhofmeister/tax-blog-index

To complete my earlier examples, I've decided to calculate the tax due on each one.

The purpose of this article is not to recommend either the more or less aggressive position, but rather, to demonstrate the impact of choosing one methodology over the other.

Problem
(1) Taxpayer A decides to invest in Bitcoin. In January, Taxpayer A buys 100 coins at the price of $9 a coin with a transaction fee of $1 a coin spending a total of $1,000 to acquire the coins. (2) In March, Taxpayer A panics at a drop in the price of Bitcoin and sells off 10 coins for $6 a coin with a transaction cost of $1 a coin making a total of $50 off the sale. (3) In April, Taxpayer A decides to sell off 20 coins when the price of Bitcoin spikes to $16 at a transaction cost of $1 a coin making a total of $300. (4) Also during April, Taxpayer A exchanges 30 Bitcoins for 60 Ripple with the price for Bitcoin remaining at $16 a coin and incurring $1 a coin in transaction costs. (5) In May, Ripple spikes to $11 which prompts Taxpayer A to sell 30 Ripple with the transaction cost of $1 a coin. (6) In February of the next year, Taxpayer A decides to sell off his remaining Bitcoin at $21 a coin with a transaction fee of $1 a coin receiving $770. (7) In June of the next year, Taxpayer A decides to sell off his remaining Ripple (30) at the price of $16 with transaction costs of $1 a coin.

Solution
Note that I am not considering any outside income in an effort to focus on the tax effect of the transaction. Additionally, I am breaking out the tax consequences if a taxpayer is in the 2017 (2018) 10% (10%), 15% (12%) and 25% (22%) tax brackets.

Aggressive

Conservative

By taking a more aggressive position, a taxpayer could potentially reduce their overall tax liability in the above example by $7. Any taxpayer considering this position should also consider that for each like kind exchange that they will be forced to complete form 8824. In the instance that the IRS decides to apply the 2018 retrospectively, the IRS will be able to easily determine which taxpayers are most vulnerable. Additionally, an amended 2018 1040 would likely be required to offset some of the loss from changes to the 2017 1040 as well as penalties and interest which could be potentially assessed.

Note that the long-term capital gains rate was not substantially changed by the new tax bill (0%, 15%, and 20% brackets based on income).

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.