What are your thoughts on the IRS tax treatment of cryptocurrency investments?

in #tax7 years ago

Hi everyone,

I'm new to Steemit, as in today being my first post, and haven't even put together an introductory post.

But this post by Jerry Banfield caught my eye: https://steemit.com/steemsecrets/@jerrybanfield/steem-secret-3-power-up-posts-when-steem-dollars-trade-below-usd1

At the bottom of the post Jerry states, "I am adjusting my tax payment system by only paying tax when I actually power down and then cash out to my bank account or another cryptocurrency at which point it becomes income because potentially overpaying a whole lot on something that is not clearly defined as a currency seems foolish."

So I felt compelled not only to comment on his thread, but as a crypto investor to glean how each of us considers the tax treatment of crypto.

As I understand it, the IRS hasn't come out and defined cryptocurrency as money. It's my understanding that it's treated as property for tax purposes.

So if that's the case, going from one crypto to another (and in some cases that is the only way to buy some cryptos) would seem to me to be more like a 1031 exchange.

"IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free."

That being said, just hours ago, I read this: https://www.forbes.com/sites/greatspeculations/2017/08/15/cryptocurrency-traders-risk-irs-trouble-with-like-kind-exchanges/#77e85ae226a8

"Section 1031 specifically excludes stocks, bonds, notes, and indebtedness. It does not mention “cryptocurrency” or “virtual currency” since Section 1031 predated the advent of cryptocurrencies."

That being said, cryptocurrency 'coins' are not stocks, bonds, notes or indebtedness and the IRS does not define it as currency, but property, hence the treatment as capital gains.

When you sell a home you own, you trigger capital gains. When you do a 1031 exchange, you're going from one home to another which can be bigger, smaller, in totally different locale, but you don't trigger capital gains.

The IRS hasn't publicly ruled on the treatment of using 1031 like exchange between cryptos. So as I understand it, crypto only becomes income when you cash out to fiat.

In the case of stock exchanges, there is an intermediary step of going to fiat before using that fiat to buy another stock, but that's not the case with crypto.

And while the IRS can play a heavy hand with Coinbase and other U.S. based cryptos, if it overplays that hand, I can easily see not only exchanges outside US jurisdiction coming into play, but crypto investors will gravitate to a decentralized crypto 'exchange' where there is little chance of the IRS ever being able to tie cryptocurrency to an investor.

How do you see it?

Sort:  

Bienvenido a Steemit! Este Post puede tener muchos upvotes con la ayuda del King: @dineroconopcion, El cual es un Grupo de Soporte mantenido por @wilbertphysique, @yoenelmundo y 5 personas mas que quieren ayudarte a llegar hacer un Top Autor En Steemit sin tener que invertir en Steem Power.Te Gustaria Ser Parte De Este Projecto? Click aquí para ir al grupo de Discord donde hablamos de steemit y criptomonedas

Welcome to Steemit! This Post can have many upvote's with the help of the King's Account: @dineroconopcion, It's a Support Group run by @wilbertphysique, @yoenelmundo, and 5 other people that want to help you be a Top Steemit Author without having to invest into Steem Power. Would You Like To Be Part of this Project? Click here, go to group discord where we talk about steemit and cryptocurrency

votes.png

Congratulations @cloudbender! You have completed some achievement on Steemit and have been rewarded with new badge(s) :

You made your First Comment
You made your First Vote
You published your First Post
You got a First Vote

Click on any badge to view your own Board of Honor on SteemitBoard.
For more information about SteemitBoard, click here

If you no longer want to receive notifications, reply to this comment with the word STOP

By upvoting this notification, you can help all Steemit users. Learn how here!

Congratulations @cloudbender! You have completed some achievement on Steemit and have been rewarded with new badge(s) :

Award for the number of comments

Click on any badge to view your own Board of Honor on SteemitBoard.
For more information about SteemitBoard, click here

If you no longer want to receive notifications, reply to this comment with the word STOP

By upvoting this notification, you can help all Steemit users. Learn how here!

Congratulations @cloudbender! You have completed some achievement on Steemit and have been rewarded with new badge(s) :

You got a First Reply

Click on any badge to view your own Board of Honor on SteemitBoard.
For more information about SteemitBoard, click here

If you no longer want to receive notifications, reply to this comment with the word STOP

By upvoting this notification, you can help all Steemit users. Learn how here!