No Tax Breaks for Cryptocurrency Investors

The newly signed United States tax code edits the IRC Section 1031(a)(1) to include cryptocurrency trades under the tax regime. This closes a legal loophole. President Donald J. Trump signed the bill into law. This step marks the pioneer major tax overhaul in United States over a period of 30 years.

Whatever the pros and cons of the bill, for cryptocurrency investors, this constitutes bad news. The effect of this bill will be applicable from January 1, 2018. Tax will be imposed for swapping one cryptocurrency for yet another.

Like-Kind Exchanges

The overhaul corrects a section of tax code when it comes to exemptions for the “like-kind exchanges”. These permits investors to swap assets of similar nature without initiating a tax event. Such colloquially known “1031 exchanges” were long been utilized by traders. They use to exchange different kinds of properties, like real estate or art, sans the payment of any taxes on them.

The IRS, from March 2014, has regarded digital currencies like Bitcoin as a kind of property where tax can be extracted. This makes such currencies eligible for capital gains tax. The taxes should be paid whenever the digital currency gets exchanged for any fiat currency. Cash is one example of fiat currency.

Holding Times

Standard income tax are levied in digital coins held less than one year. The quantum of taxes could range anywhere from 10 percent to 37 percent. This depends on the income levels of the individual. In case, the cryptocurrency is held for more than a year, they will be subjected to the capital gains tax for longer term. This tax is a maximum of 24 percent. There is a problem, however. Trading between two dissimilar cryptocurrencies qualifies as “like kind exchange”. This is important as until this point, trades of cryptocurrencies have generally been regarded as legal gray area. These grants most traders a profitable loophole for the deferment of taxes imposed on capital gains in the short term. The new edit definitely funnels 1031 exemption to solely cover swaps of real estate. Bitcoins and other cryptocurrencies are fully excluded. It particularly limits the law's scope from previously covering the amorphous term “property” to only now cover “real property”. Since it is a digital currency, cryptocurrency can never be “real property”.

It means that all trades of cryptocurrency will be taxed at execution time. This will bring a complete end to one of the most profitable loopholes once used by traders.

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