Last Friday, U.S. president Donald Trump signed a new bill into law, marking the first major tax reform in the U.S. in almost 30 years. While some people might be rejoicing at this news, this bill will definitely come as a downer for cryptocurrency investors – starting January 1st, 2018, all cryptocurrency trades will be subjected to taxes, and this includes the exchanging of one cryptocurrency to another.
Amending The 1031 Loophole
IMAGE COURTESY OF CBPP.ORG
If you are a frequent taxpayer, you must have heard of the ‘1031 loophole’. This part of the tax code accounts for an exemption for ‘like kind exchanges’, which allows investors to swap assets that are of equal value without triggering a tax event. This is also known as the ‘1031 exchange’, and traders have always used it to exchange tangible property such as art or real estate without incurring any taxes.
Since March 2014, the Internal Revenue Service (IRS) has always treated Bitcoin and other cryptocurrencies as property that is subjected to capital gains tax. In other words, a certain amount of tax will be incurred every time each of these cryptocurrencies is exchanged for fiat currencies (i.e. US Dollars, Euro). The rate of taxation can range from anywhere between 10 to 37 percent, depending on how much money you make.
Now here’s where things get a little tricky. It has never been made clear whether the exchange of two different cryptocurrencies – such as the ones we see on most major exchanges like Binance and Bitfinex – are counted as ‘like kind exchanges’. Until today, all cryptocurrency trades have always stayed in this legal gray area, causing most traders to capitalize on this loophole and defer taxes on short-term capital gains.
However, the recent tax overhaul changes everything. By limiting ‘like kind exchanges’ to exclusively cover only real estate swaps, the IRS is making sure that cryptocurrency traders can no longer benefit from the 1031 loophole. The amendment limits the scope of the law that previously covered “all property” to only “all real property”. As a virtual currency, Bitcoin, or other cryptocurrencies for that matter, are definitely no way close to being a ‘real property’.
The recent IRS update serves as a massive blow to U.S. cryptocurrency traders as they will now have to pay taxes for simply swapping between cryptocurrencies. Thanks to this controversial bill, it wouldn’t be long before tensions with the IRS get to new heights as more and more Americans try to avoid their tax obligations next spring.
