Are you being treated like a Fortune 500 executive? I don't mean the high life, fancy cars and luxury high rise apartment living (maybe if your altcoins moon of course): I am referring to the taxes.
The fact is, Cryptocurrency (I.e. Bitcoin) taxation issues are similar to the issues related to stock compensation for Fortune 500 Company executives, such as the Chief Executive Officer of a company. There is one big common sense difference between tax impacts to CEO's and Steemit Authors/Crypto Investors that isn’t in the code: Resources.
U.S. CEO's
CEO's and company executives receive stock compensation (such as restricted awards and options) in exchange for running the companies. They run into U.S. tax issues under Section 83. Often CEO's have to sell some of their shares back to the company, or take a loan, just to pay their tax bill. This is because CEO's are often taxed on the stock even if they haven't sold it for USD FIAT.
Company executives with stock compensation typically have a human resources department, finance department and a tax department who are all scrutinizing stock compensation for various reasons; plus the executive will have their own personal CPA or law firm handling their tax filing. Furthermore, the executive will typically receive W-2 with taxable income, a Form 1099-B on the sale of the shares (and Form 3921/3922 for incentive options or employee purchase plans). Thus, there are a ton of resources available for the executive to deal with this complex area of tax law. In short, CEO's have a ton of brain power at their disposal to get their taxes right for both themselves individually and for the company.
U.S. Steemit Authors and Crypto Investors
Most cryptocurrencies are treated as property for U.S. taxes (IRS Notice 2014-21), meaning buying/selling has tax consequences. Further, the Steem and SBD we receive for authoring rewards is subject to taxation under Section 83, just like CEO's stock compensation.
The big difference is, cryptocurrency investors do not have 1099 forms (yet), and do not have a team of experienced resources at this disposal. Sure some exchanges provide "basis" estimates, and there are websites that offer to “help”, but can they be trusted with the data? After all one of the biggest risks in cryptocurrency investing is hacking. Also, could they know about information that is pertinent to your tax situation but might be outside of your dataset? Would they take on the due diligence to seek information that you did not provide up front?
Could I use a "securities" form of crypto to help with the tax simplification?
Sure, you could just buy the Bitcoin EFT GBTC instead of Bitcoin to hopefully have your information tracked by your broker, but that itself is not as simple as it seems. Note that GBTC stock is actually an investment in a Trust (a flow-through entity); so the layer of buying/selling underneath the stock impacts its investors.
Here is a link to the 2016 reporting: https://grayscale.co/wp-content/uploads/2015/09/Bitcoin-Investment-Trust-2016-Tax-Information-Letter-FINAL.pdf
Here is a link to a previous discussion of GBTC: https://grayscale.co/wp-content/uploads/2015/09/Bitcoin-Investment-Trust-2016-Tax-Information-Letter-FINAL.pdf
Can I close my eyes and yell "Like Kind Exchange?
After 2017, under tax reform crypto-for-crypto swaps are not qualified for like-kind exchange because it only will apply to real estate. However, don't be fooled for 2017.
For 2017, taking a like-kind exchange position on crypto-for-crypto swaps is a potentially aggressive tax position and will require all of the appropriate documentation. You would have to make the argument the only difference in two cryptos are quality/grade, and not different practical uses (as changing the use case is disqualifying like kind treatment). In short, pre-2018 was very unclear/ambiguous, in fact see below a comparison of crypto to the rulings for precious metals. My initial take was BTC for Eth was probably a taxable event, BTC for Litecoin is ambiguous at best although I didn't conclude, rather I asked the community for input:
https://steemit.com/money/@cryptotax/cryptocurrency-like-kind-exchanges-what-can-we-learn-from-gold
Takeway
There are no quick answers to cryptocurrency taxation, and in fact the best option is to contact a tax advisor who is willing to take on the issue. Sure the fees will be high but an investor in crypto for the past year should have massive gains with which to pay such fees.
Plus, the good news is I have spent months intensively researching and understanding the common issues for crypto investors. It is both a pet project and a passion. If you have friends/family investing with tens or hundreds of thousands of dollars (this may sound crazy but there is tens of billions (USD) in transactions each day), please don’t hesitate to share this blog. The guidance is 100% open source and free (with the caveat this is not personal tax advice to anyone, is not a client relationship with the author, and cannot be used to avoid taxes/penalties/interest). Link below:
https://steemit.com/money/@cryptotax/crypto-tax-series-e-book-2017-edition-u-s
Happy New Year!
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post/book does not create a client relationship between the author and the reader.
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