Tax Guide to Cryptocurrencies – Part 1: Like Kind Exchanges
By Victoria Leca, Tax Accountant at Delap
In recent years cryptocurrencies have become extremely popular. From the meteoric rise of Bitcoin, to the founding of Coinbase, which now has over 13 million users, to new cryptocurrencies being developed daily, it has been a challenge for regulators to keep up. So the onus now falls on cryptocurrency holders to report their activity to the IRS. In the following weeks, we will continue to publish these tax guides to cryptocurrencies and address how these assets should be treated on a tax return.
Massive gains in the cryptocurrency market has created an incentive for the IRS to act. It has been a long time since the department has issued any official regulations governing cryptocurrencies, such as Bitcoin, but the latest tax law ensures that digital currency traders will have to pay their fair share of taxes.
Tax Bill and Cryptocurrency Exchanges
In Notice 2014-21, the IRS explained for the first time how it will treat and tax cryptocurrencies. They have deemed that “for federal purposes, virtual currency will be treated as property”. Since then, we have had a tax overhaul and the new tax bill amended a part of the tax code that deals with exemptions for “like kind exchanges”. This provision allows taxpayers to swap similar assets or property without triggering a tax event. Virtual currency traders were hoping that they too would qualify if they exchanged Bitcoins for Litecoins or any other virtual currency. However, the law narrows this provision to cover only real estate exchanges, thus eliminating virtual currencies entirely. Even though these currencies still qualify as property, they are excluded from the category of “real property”.
All cryptocurrency trades will now be taxed at the time of their execution, with gains and losses reported on the tax return. Since the IRS is still struggling to enforce the new law, the responsibility falls onto the taxpayer to keep good records of trades and exchanges. The IRS is working hard at trying to get cryptocurrency exchanges, such as Coinbase, which brokers exchanges of Bitcoins and other digital assets, to report transactions. This would be similar to financial institutions which are required to report to the IRS and also send taxpayers reports of realized gains and losses on form 1099. For now, the exchanges have held out and not released too much information. But due to the rapid increase in value of cryptocurrencies and their growing popularity, the IRS has an incentive to move fast and make sure that gains are taxed.
Here at Delap LLP, we are committed to bringing you the highest level of service and making sure that we are always aware of policy developments that affect you. If you have any questions about reporting virtual currency exchanges, please contact our team today at (503) 697.4118.