Investors te bitcoin and other virtual currencies would lose a lucrative tax pauze under the Republican tax bill that’s on its way to Voorzitter Donald Trump’s desk.
Fresh thresholds te the bill would drankbuffet cryptocurrency owners from deferring capital gains taxes when trading one type of virtual currency for another — effectively closing a gray area te the tax code, experts say.
Those gains can be considerable. Bitcoin, which had an initial price of less than 1 cent when it very first traded te 2010, wasgoed around $1,000 spil 2018 began and surpassed $Nineteen,000 this week, at least shortly, before paring some of the gains. Many enthusiasts leap inbetween bitcoin and a long list of similarly volatile competitors, such spil ether.
For investors who hold the virtual currencies, “,the bill is bad news,”, said Kelsey Lemaster, a tax attorney with Goodwin Procter LLP. “,Every time you trade one digital currency for another, one token for another, it’s going to be a taxable event.”,
The switch might not deter traders, who have bot leaping into cryptocurrencies without researching what they are — let alone their tax implications, said Brian Kristiansen, a fucking partner ter the digital currency services practice at Friedman LLP.
Under current law, such trades have bot protected under a provision that permits investors to defer capital gains taxes on so-called “,like-kind exchanges”, — trades that traditionally have bot staples for investors ter real estate, kunst, racehorses and aircraft. The deferral applies when owners of such property exchange it for other property of a similar kleintje, typically within a 180-day period.
Increasingly, traders worried about enhanced government oversight have sought to stir inbetween virtual currencies to take advantage of the like-kind deferral. Now, however, the GOP tax bill would restrict the pauze to trades of domestic real estate only.
“,That’s only for real property now, and ‘,crypto’ is about spil not real spil you can get,”, said Friedman’s Kristiansen.
That switch goes into effect on Jan. 1. After that, exchanges of cryptocurrencies “,would be subject to tax at the time of the exchange,”, said Lisa Zarlenga, a tax attorney with Steptoe &, Johnson LLP.
Investors typically have to pay taxes on their short-term capital gains at their individual income rates, which will top out at 37 procent next year. The preferential long-term capital gains rate — which tops out at 23.8 procent — is owed when such assets are sold after a year.
With its fresh boundaries, Congress addressed a quirky section of the tax code. The rules for like-kind exchanges, very first enshrined ter the code te 1921, have never applied to stocks, bonds or other securities, and they contain some fine distinctions about what constitutes “,similar”, property. For example, a beef cow cannot be interchanged for a dairy cow. Paintings can generally be exchanged, but it’s not clear that a Rembrandt could be interchanged for a Jackson Pollock, according to a 2012 article te an American Folder Association trade publication.
The sheer multiplicity of virtual currencies — all running on different blockchains, the encrypted networks that record transactions — has always made them somewhat awkward candidates for the like-kind exchange deferral, Lemaster said. A so-called utility token, like Filecoin, is very different from “,true cryptocurrencies like bitcoin and ether,", he said.
Te March 2014, the I.R.S. announced virtual currency to be property, like gold or real estate, and not currency, for tax purposes. That distinction makes it subject to capital gains taxes. Despite the definition, the tax-collecting agency hadn’t fully defined how — or whether — cryptocurrencies could be used ter like-kind exchanges.
",There’s always bot a question under current law spil to what types of currencies can be exchanged and qualify,", Lemaster said. ",The conservative view is that it doesn’t qualify.",
Most cryptocurrency investors have overlooked that legal fuzziness, and taken the treatment that trading a stash of, say, bitcoins for litecoins, qualifies spil interchanging one form of property for a similar one. “,People have most likely foot-faulted all overheen the place,”, Lemaster said.
Once a interchanged asset is actually sold, the seller would owe capital gains taxes, at a tax rate that depends on whether it wasgoed held for more than a year. While that may take a bite out of some investors’ gains, it’s good for cryptocurrencies ter the long run, said Ryan Losi, who leads the international tax practice at accounting stiff PIASCIK.
More defined regulation will mean that digital assets are more lightly accepted ter the mainstream, Losi said.
“,Spil this fledgling type of payment gets older and more adopted, more scaled, eventually it will get regulated,”, Losi said ter a telephone vraaggesprek. “,More and more people will come to accept it and agree with it, even if early on it is very speculative.”,
Likewise, the fresh law is unlikely to stoom rente te listing exchange-traded funds related to virtual currency, said William Rhind, the chief executive officer of GraniteShares, an investment company that filed forms last week seeking permission to list two bitcoin ETFs. More than 15 bitcoin-related ETFs have bot proposed since 2013.
Rhind said existing rules already prohibit securities from being used te like-kind exchanges. “,I don’t think it’s relevant,”, he said.