Are crypto riches tax-free?

Forbes - - CRYP TO CURRENCY -

With bil­lions be­ing made in the crypto-bub­ble, un­cle Sam wants his cut. Get­ting his hands on it will be an­other mat­ter.

in 2014, the irs is­sued con­tro­ver­sial guid­ance stat­ing that u.s. tax­pay­ers should treat dig­i­tal cur­ren­cies as cap­i­tal as­sets, pro­vided those cur­ren­cies are con­vert­ible at some point into tra­di­tional cash. (in other words, play money in an on­line game doesn’t count.) the up­side of cap­i­tal-as­set treat­ment is that any­one who sells a dig­i­tal po­si­tion he’s held for more than a year is taxed on his profit at the lower long-term cap­i­tal gains rate—cur­rently 0% to 20%. the down­side is that traders who hold their po­si­tions for shorter pe­ri­ods are taxed on gains at or­di­nary fed­eral in­come tax rates of up to 39.6%.

but an even big­ger prob­lem with the irs’ po­si­tion is this: any­one us­ing dig­i­tal coins to pay for some ser­vice on­line—say, buy­ing data stor­age—would, it ap­pears, have to treat each pur­chase as a cap­i­tal sale. and if the value of the coin be­ing spent has gone up since he ac­quired it, he’d have to re­port and pay tax on a gain. (by con­trast, if you hold a con­ven­tional cur­rency—say, eu­ros or yen—and you hap­pen to spend it af­ter it has gained value against the dol­lar, the irs doesn’t con­sider that tax­able in­come.)

re­port­ing on the tax­payer side isn’t op­tional: in­come is in­come, whether from trad­ing stocks or bit­coin or spend­ing the lat­est to­ken. the re­al­ity, how­ever, is that there is no cur­rent re­quire­ment that cryp­tocur­rency ex­changes re­port trans­ac­tions to the irs the way bro­kers like Sch­wab must re­port stock sales on form 1099-b.

is tax avoid­ance adding fuel to the cur­rent ma­nia? con­sider this: in 2016, only 802 in­di­vid­ual tax re­turns out of the 132 mil­lion filed elec­tron­i­cally with the irs re­ported in­come re­lated to cryp­tocur­ren­cies.

the gov­ern­ment wants more com­pli­ance. last novem­ber, the depart­ment of Jus­tice filed suit in fed­eral court seek­ing to is­sue a sum­mons forc­ing coin­base to turn over records on all u.s. cus­tomers who trans­ferred con­vert­ible vir­tual cur­rency be­tween de­cem­ber 31, 2013, and de­cem­ber 31, 2015. the court sided with the irs ini­tially, but coin­base—and coin­base cus­tomers—have pushed back, de­lay­ing en­force­ment of the sum­mons. even if the irs gets all those cus­tomers’ names, how­ever, it still has a big prob­lem if it wants to tax all the crypto-gains: much of the trad­ing is done on over­seas ex­changes, and even more could mi­grate there.

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