Think You Can Hide Capital Gains in Alt-Coins? Think Again…

Rick D. | December 14, 2017 | 11:12 pm
Coinbase IRS Delayed

Think You Can Hide Capital Gains in Alt-Coins? Think Again…

Rick D. | December 14, 2017 | 11:12 pm

Those Bitcoin investors in the US who think they’re outsmarting the IRS by trading funds to other digital currencies rather than back to dollars could be in for a nasty surprise. Under GOP tax bill that is due to be voted upon next week, law makers will draw a distinction limiting “like-kind” exchanges to real estate.

It’s been argued by some that using Bitcoin or any other digital currency to purchase a different crypto should be treated the same as a 1031 exchange. This allows taxpayers to exchange one type of asset to another without it being deemed a taxable event. Since the IRS considers Bitcoin as property rather than currency, it was thought that digital currencies could be considered as “like” assets.

Evan Fox, the tax manager at New York accounting firm Berdon gave his opinion on the matter to CNBC:

“Some people think, ‘I’m taking my bitcoin, which the IRS has deemed to be property, swapping it for another property and doing it for investment reasons,’ so it sounds like it could be a 1031 exchange… I think it’s a stretch.”

However, under the new bill, any debate will be rendered moot. It explicitly limits 1031 exchanges to real estate. This gives an answer to all those accountancy professionals who have struggled to advise clients invested in Bitcoin and other cryptos because of the law lagging behind technological innovation.

For now, people cashing out or trading digital currencies in the States should beware. Other investments will often trigger the a brokerage to send a Form 1099 automatically which also goes directly to the IRS, alerting them to your trading. These forms are used to record losses and gains. However, it’s important to remember that the absence of such a document does not mean that taxes are not owed. This makes it necessary to self-report.

It’s also worth noting that the IRS have up to three years to conduct an audit. It could be as late as 2020 that your 2017 tax return is brought into question. Fox warned that penalties and interest might face those who do not correctly report their cryptocurrency gains.

He summed up the situation pretty clearly for CNBC’s readers considering risking not reporting crypto trading gains:

If you put money into the cryptocurrency space, and you decide to buy [another digital asset], and you one day monetize it and show up with a $2 million house, the IRS is not stupid.

The taxation expert concluded by suggesting that the number of returns this year will be a matter of great interest to those at the IRS. Previous years have seen suspiciously low numbers of traders reporting their cryptocurrency gains, and this year will no doubt be the same.


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  • 1nationundergod

    Should be taxed like stock not property. Republicans can’t stand poorer people getting rich without approval from them.

    • PRC

      This is NOT a partisan issue.

    • angryyoungman

      Uhh, this move DOES tax Bitcoin like stock. You can’t swap GE stock for GM stock now as a like-kind exchange, so why should you be able to swap Bitcoin for some other digital currency?

      • 1nationundergod

        Swapping is an even value trade. So no gains yet. Only gain when you take a profit. If half a bitcoin is worth 10,000 and you swap it for 10,000 worth of iota there is no gain. Only when you cash it in for USD is it worth anything. The iota you bought can go to zero value which means you lost money. Why pay tax on something before you actually profit? You pay tax on stock when you sell it no?
        If you trade it for another stock of equal value where is the profit? I do not believe for 1 second a broker trader is paying 33% tax on a stock he hasn’t cashed out yet.

        • angryyoungman

          Well, it’s obvious that you don’t agree with the tax code, but yes, if I buy GM, it goes up in value, and I swap it for stock in Apple or GE, I pay tax on the gain in GM stock. The fact that I took Apple stock instead of cash is irrelevant.

          With limits, you can trade real estate for real estate by virtue of a special, but that’s about it for US taxes.

          (In some corporate deals such as spin-offs or mergers, the transactions may defer capital gains, but those don’t apply to individual choice trades.)

          • Frank Dashwood

            You are incorrect. Exchange without liquidation to USD is not taxable as “capital gains”. Otherwise all barter would become illegal. You can only tax on “REALIZED” profits…ie POST-LIQUIDATION.

          • angryyoungman

            Authority for that? None exists.

            You’re wrong. Barter IS taxable, but the IRS has no easy way to enforce it. Just Google “Is barter taxable?” and educate yourself before you look like an idiot elsewhere.

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