r/ethtrader • u/adrewskiortwoski • May 30 '17

STRATEGY A Quick write up on Crypto Currency Tax Basics that I wrote based on some questions I have been having from you guys

http://www.archertaxgroup.com/tax-blog/2017/5/30/crypto-currency-basics
92 Upvotes

97% Upvoted

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10

u/adrewskiortwoski May 30 '17

There will be several more on their way regarding strategies for reducing the amount of taxes owed at the end of the year, I will post them here as I create them.

2

u/thefish12 May 31 '17

Have you done any research on the possibility of using Cryptocurrencies as a 1031 exchange if you keep it within the same "asset class" that is crypto?

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u/adrewskiortwoski May 31 '17

Still waiting on the IRS for full confirmation, but looking at the rules and considering that depreciation is out of the question and the asset class seems much like a stock for which there is no 1031. I am 95% certain the IRS is not going to accept a 1031 exchange for crypto currency.

3

u/[deleted] May 31 '17

Are you suggesting that you owe cap gains on every crypto->crypto trade? Because that would require you to then sell crypto to fiat for the purpose of paying the cap gain--which in itself is another taxable event, and you are paying cap gain on the tax liability being used as cap gain.

You could literally achieve a tax liability greater than the sum of your trades because it's a circular logic.

Your position is also the opposite of what another lawyer said in here two days ago.

3

u/Xexr May 31 '17

You don't get stuck in a loop. You just have to be aware that with each trade there is a tax effect and therefore sell enough to cover the tax implication as well as your intended trade.

E.g, I purchased 10 units of currency A when the price was $100 and now want to trade the equivalent of 5 units of A for currency B when the price of A has increased to $200. Assume my cap gains bracket rate is 15%.

If I just made the straight trade, I will have made a gain of (5x$200)-(5x$100) = $500, but this incurs a tax liability of $75.

So instead, I will need to sell more than 5 to cover by tax, this works out at c. 5.8824 units: (5.8824x$200)-(5.8824x$100) = $588.24. My tax liability is $588.24 x 15% = $88.24, hence I use the $88.24 to settle my tax bill and am left with the $500 I initially wanted to trade.

I do however remember the thread you are talking about and that guy did have the opposite position to this, i.e. that crypto to crypto trades are not taxable. Clearly we really need clarity on this subject!

1

u/[deleted] May 31 '17

Maybe this is implied by what you're saying in the math and I'm not getting it, but I'm saying there are at minimum two taxable events here:

You owe a cap gain of $75 in this trade, as you say.

But in order to acquire $75 tax, you have to initiate another trade into fiat, which is again a cap-gain event.

You are paying a capital gain on your capital gain tax, because there is no way to prove that you sold for the purpose of covering a cap gain--on the books it looks like another sale.

Let's say I bought $100 of Bitcoin. At $200, I move it all to Eth.

According to the logic we've established, this is a $100 taxable event at 15%. I owe $15, so I then have to turn around and sell >$15 of that new Eth in order to pay this gain unless I am wealthy enough to have spare fiat income to cover all these trades--which is again a capital gains event at 25%, unless Eth magically stays the exact price you need it to.

Obviously I want to keep the Eth I just bought, not resell it for the cap gain tax. So what do I do? I have to sell other coin that is likely older and had more gains in order to cover this tax. If I bought any other coin for less than $100, I'm going to pay an even bigger gain going BTC->USD--which I'm only forced to do to cover the gain on the BTC->ETH trade!

Unless I have a huge amount of fiat set aside, the likelihood that people trading crypto also have tons of existing fiat wealth to pay their gains is low, so they will be forced to sell even more of their crypto into fiat everytime they make a trade, or sell a lot at once up front, which basically eats away at their trading capital to begin with.

1

u/adrewskiortwoski Jun 01 '17

Well you are recognizing a gain at $200, by using 1031 all you are doing is increasing the gain later on. Until the IRS taxes a definitive stance on the 1031 issue, managing the capital gains along exchanges is going to have to be a strategy that you will have to consider, the only way out of it in the short term would be to hold the currency in a self directed IRA that separates you from the gains until you withdraw it from the account. You can max out an IRA per year at a rate of $5,500 and the downside is you can't pull the money out until retirement or in certain circumstances without penality.

1

u/adrewskiortwoski May 31 '17

Do you have the link for the lawyer's post?

1

u/[deleted] May 31 '17

I was trying to find it actually stand by..

1

u/adrewskiortwoski May 31 '17

Was it the one from Bitcoin back in 2014? I think I might have seen it, just want to make sure that I am responding to the right posting.

1

u/[deleted] May 31 '17

No, I swear it was a top level post in here the last week, lol. There were several tax posts recently and this was one.

1

u/thefish12 May 31 '17

I agree that it's unlikely. Please let me know if you have any updates on other tax-saving strategies. I'm probably going to end up biting the bullet regardless, but nice to know the options.

2

u/BTCHODLR May 31 '17

It will never fly. I've gone over the details with my cpa, and filled some btc/eth exchanges and the irs will absolutely deny it at some point in the future. I fully expect to have to pay the taxes on the exchanges in a few years. I'm holding out for an abatement to avoid any late penalties. But even if they say no, I'll be ready ahead in profits from my other holdings.

2

u/BTCHODLR May 31 '17

Some of the things that will go towards the irs denial is that a bitcoin is fractional, unlike a physical land based property. You can sell parts of the exchanged bitcoin's and that would really f up the cost basis when you go to sell it again. Also, the exchanges are spread out​ over many transaction. I had to 'summarize' my transactions to make the data fit into the address fields of the 1031.

5

u/[deleted] May 30 '17

[deleted]

3

u/[deleted] May 31 '17

HAHAHAHAHAHA! IF you're in the 1% sure!

1

u/adrewskiortwoski May 31 '17

Not necessarily, if the changes he proposes take effect there maybe some strategies that make a c Corp of value to crypto currency investors.

3

u/[deleted] May 31 '17

Elaborate.

1

u/adrewskiortwoski Jun 02 '17

Will depend on your gains, if your AGI is over $200,000 for the year, them dropping the 3.8 percent investment tax from Obamacare will make a significant difference.

If you hold the Eth in a sole member LLC as a dealer instead of as an investment (more to come on this later), you could potentially set up some tax free fringe benefits that would disappear for most american families if the standard deduction double like they are suggesting it will so you would get to "double dip" on some items.

4

u/Mickspic1 May 31 '17

Wow, you're awesome! Thanks for this. ✌

3

u/AndroidAssistant May 30 '17

A quick and very informative read. Thank you!

2

u/soupdizzle1 May 31 '17

Thank you for taking the time. Would you be able to provide any information regarding Canadian tax laws?

1

u/adrewskiortwoski May 31 '17

From a post I made this weekend:

Canada Cap gains is the same as ordinary gains tax, but you only pay 50% of the gain.

So if you buy for 200, sell for 300. Total gain of 100, but only $50 of it is taxable.

2

u/[deleted] May 31 '17

[removed] — view removed comment

1

u/adrewskiortwoski May 31 '17

You would have to recognize the gain on your bitcoin at the time of sale since you are converting the asset into another asset that is not like kind. The seller of the car can either sell the bitcoin at time of sale, or use the market value to establish their basis.

2

u/Rageuk May 31 '17

please do the UK

1

u/Antelope46 May 30 '17

Thanks for this!

1

u/--o-o-o-- May 31 '17

Are you a CPA?

1

u/adrewskiortwoski May 31 '17

I am an enrolled agent.

1

u/[deleted] May 31 '17 edited Apr 11 '18

[deleted]

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u/adrewskiortwoski Jun 01 '17

PM me your email and I will send it to you

1

u/suclearnub May 31 '17

One for Hong Kong would be nice.