We have 7.5 months to go before 2017 taxes are due and a lot of people are unsure about how they will handle taxes in the US as it relates to crypto. There have been a couple of great posts made on the subject that sparked a lot of debate. A couple of the posts I liked were:
- Post 2 days ago by @Lexiconical on how some are over calculating their crypto taxes
- 3 Part Post a month ago by @canuckpride, who is a CPA, on how most are under reporting crypto taxes
- Post 2 months ago by @JerryBanfield on how to over calculate taxes on Steem and other crypto and bend over backward for the IRS
The IRS has declared that crypto currency is considered a property
This means that the IRS wants to treat crypto like a stock for tax purposes. A stock transaction can be classified in two ways:- If you buy a stock and sell after a year or more, it's considered a long term capital gain. Long term gain taxes on stocks in 2017 ranges from 0 to 20% depending on which tax bracket you are in. 15% long term capital gains tax is probably the most common for working adults.
- If you buy a stock and sell in less than a year, you pay tax as if it's ordinary income. If your profit from the transaction was $1k, then the IRS would consider that $1k of profit like ordinary income. The tax on that ranges from 10% to 39.6% depending on your tax bracket. The average working adult is probably paying over 25%.
This is fairly standard for stocks, but isn't so cut and dry for crypto because everything is so new and not particularly well defined. This has led to some common arguments on tax related Steem threads.
5 common group of commentators on tax threads
- Group A: Great Post, SPAM, or other no value add commentator
- Group B: Overly cautious group that thinks paying taxes is the law so they pay tax on every transaction even though I don't want to.
- This is probably where @JerryBanfield and maybe @CanuckPride fit in.
- Group C: Screw the IRS, IRS is crooked, I won't pay a dime because they can't catch me
- Group D: Screw the IRS...I don't want to break the law so I'll pay taxes. But, I will spend a lot of time and effort to figure out how to minimize those taxes legally.
- My guess is @Lexiconical and @FinancialCritic fit in here. It's also where most publicly traded companies fit in.
- Group E: I'm either young and just started paying the tax man or don't know the US tax laws or I pretend like nothing happened and potentially break the law. I don't think ignorance is against the law, so I'll just look the other way
- My perception is that this is a surprisingly large group based on comments on Steem.
Basic Tax Law that most commentators do understand
- You owe taxes at the time you sell a stock. If you don't sell it and just HODL, then you don't owe any tax.
- This is correct. Let's apply it to crypto...you own 10 Ether and are HODL. You don't owe taxes on that 10 Ether while you are HODL. When you do sell the 10 Ether, you owe tax on the profit.
Common Tax Laws that most commentators get wrong
- I'll trade my 10 Ether into Bitcoin, and then trade those bitcoin into Stratis or other crypto. I haven't sold crypto into US Dollars, so I'm still HODL and don't have to pay taxes.
- This is wrong! Look at it as if it's a stock. You buy Stock A, after a week you trade Stock A for Stock B. I don't know how you would even trade Stock A for Stock B without going to fiat in the middle. But, if you could, then that would be a taxable event.
- I earned this crypto by mining or by blogging or doing a translation for an ICO. I don't have to pay tax on that because I'm still HODL.
- This is incorrect. Look at it as if it's a stock. You work for a company and are given stock as a bonus. You don't sell the stock, but you still owe taxes on that at the end of the year based on the value of that stock at the time you get it. A lot of people that work at publicly traded companies receive stocks as a bonus, so this has been vetted by many CPAs and other tax professionals....not much wiggle room on this rule.
- I got this crypto as a gift, I don't have to pay tax on this. You don't pay tax on gifts, otherwise you would have to report every gift you get on birthdays or Christmas.
- This is both correct and incorrect. Gifts are taxed by the IRS, but only above a $14k threshold per year by the IRS. If you get a check for $10k for your birthday, then you don't have to pay tax. If you get a $50k check, then you would have to pay tax on that....in fact, your bank would report it to the IRS.
I'm not suggesting you bend over and pay tax on every crypto trade!
I want to be clear on my position with peace and love. I am not saying you do have to pay tax on every crypto trade or even treat cryptos like a stock. I was attempting to explain the current IRS rules how you treat stock transactions in the US of A. I have also explained what the IRS' vague stance on crypto is....to treat it like a stock.
Why the IRS can't treat crypto exactly like a stock
- The IRS is underfunded and can't track every crypto transaction
- Banks and stock brokers report to the IRS and even send you tax forms at the end of the calendar year....Bittrex, Poloniex, BitShares don't report to the IRS
- Crypto transactions are more like virtual currency in games like World of Warcraft than a stock
- Many Steemit accounts are anonymous so how would the IRS even associate that with a person? Steem is decentralized, so the IRS doesn't have anyone to make the request to...they can look on the blockchain and that's about it.
You could make the case and all 4 of the arguments above are why the IRS won't come after you, but you may still be breaking the law. One analogy is that if you shoplift and get away with it, are you breaking the law? An analogy the other way is that you are drinking water from a river....are you stealing that water if nobody owns the river? This is where the arguments start....the vague IRS statements are causing these arguments!
It can be argued that some crypto currencies don't have a value until they are traded into USD or Bitcoin or Ether or Litecoin or some other crypto that is easily traded and tracked by USD.
- I have Steem power on my Steem account. The value is subjective, intangible, and can be argued to be worthless.
- It is similar to having 1 million YouTube subscribers to your channel. The value is not tangible and is very subjective. 1 million subscribers can lead to different views for different YouTubers. To someone you doesn't make videos, it's worthless. To someone who makes a video everyday, it's worth a lot.
- Users that have 6k followers on Steemit earn more per post on average than those that have 500 followers. In fact, the average follower led to 7 cents per post for the author in June, 2017. To someone who never posts, what good are the followers? To someone who posts 2x a day, it's worth a lot.
There are CPAs that work for companies that get companies out of paying taxes on rules that are 8 times less vague than this rule. I'm not saying you should or should not pay taxes based on these reasons...I'm saying that Steem power won't hold up in court in favor of the IRS.
IRS requests data from Coinbase
A few months ago, the IRS requested data from Coinbase on transactions for users based in the US. The IRS later reduced the scope of the request to only data on transactions over $20k.@Geke wrote a posted about a case relating to this
http://fortune.com/2017/07/20/judge-blasts-irs-over-bitcoin-probe-lets-coinbase-customer-fight-summons/
The judge in this particular case ruled against the IRS' request to obtain an anonymous person's data from Coinbase. The IRS can request whatever the hell they want, but that does not make it a legal request. We find out the merits of the request later when someone goes to court over the request.
Conclusion
I'm not suggesting you break the law or don't comply with the law. I am suggesting that you make the effort to get into group D from above and don't get bent over by the IRS.
What group do you identify yourself in?
Do you get bent over by the IRS often?
Quick update on my last post, where I purchased over $100k of bitcoin a few days ago. I SODL yesterday and today...and am completely out. BUYL GBTC for $390, SODL for average of $407, profit of about 4.36%. Before you ask me about tax implications, that trade was done in my retirement account!