Researchers from Indiana University and the University of Maine recently collaborated on a study that investigated the present condition of tax legislation in the United States regarding cryptocurrencies. The findings of the research are summarized in a series of recommendations that are directed for the Internal Revenue Service (IRS). If these suggestions were carried out, it would be impossible for taxpayers to deduct losses from bitcoin investments against profits from other types of investments.
The purpose of this study paper, which is named “Crypto Losses,” is to shed light on the myriad of different types of losses that may be incurred by firms and people who have invested in cryptocurrencies. In addition to this, it suggests a new tax structure to be applied to such losses.
At this time, the IRS has not issued definitive instructions on cryptocurrencies; nonetheless, bitcoin losses normally adhere to the same taxes regulations as other types of capital assets. In most cases, they may be deducted against profits from the sale of a capital asset, but not against gains from other sources, such as income. However, there are some restrictions regarding the times and ways in which deductions can take place.
For example, the amount of a loss that may be deducted for bitcoin transactions that are classified as a “sale” or “exchange” will be limited. On the other hand, taxpayers are eligible to deduct the full amount of their losses if their cryptocurrency was lost, stolen, or destroyed in any other manner (such as by burning it or through some other destructive method).
According to the findings of the research, the existing tax system does not adequately account for bitcoin losses, and it suggests adopting a different strategy in order to solve this problem. The tax system that is being suggested would make a difference between losses that are incurred as a consequence of transactions and those that are the result of the irreversible loss of assets.
According to the framework that has been presented, the only way for taxpayers to deduct losses related to cryptocurrencies that emerge from transactions is to do so against other types of capital gains. On the other hand, losses incurred as a consequence of the irretrievable destruction of assets would be totally deductable against other types of income.
In general, the findings of the research underscore the need for more clarity in the regulations governing the taxation of cryptocurrencies, as well as a more nuanced approach to the problem of how to handle bitcoin losses. Because of the widespread use of cryptocurrencies, it is imperative that the Internal Revenue Service (IRS) remain current with the rapidly evolving world of digital assets and provide transparent direction to taxpayers about their respective tax responsibilities.
President Biden’s new agenda could expand how capital gains taxes apply to crypto assets.
Included in H.R. 5376, also known as the “Build Back Better” bill, is a clause that would amend the Constructive Sale rule to apply to cryptocurrencies and other digital assets.
ADVERTISEMENT
The Constructive Sale rule was created in 1997 to prevent investors and hedge funds from taking advantage of a loophole in the law that allowed them to lock in investment gains without having to pay capital gains taxes, according to Investopedia.
Constructive sales are defined as making short sales against identical or similar properties and then entering into futures contracts that call for the same property to be delivered.
Currently, according to U.S. Code 1259, the Constructive Sale rule only applies to appreciated financial positions, which are defined as “any position with respect to any stock, debt instrument, or partnership interest if there would be gain were such position sold, assigned, or otherwise terminated at its fair market value.”
The proposed legislation would amend this clause by adding the words “digital assets” after “debt instruments,” meaning that crypto investors would no longer be able to skirt capital gains taxes by making constructive sales.
The new law would take effect as soon as the bill is passed, and would only apply to contracts signed after its enactment.
Don’t Miss a Beat – Subscribe to get crypto email alerts delivered directly to your inbox
Follow us on Twitter, Facebook and Telegram
Surf The Daily Hodl Mix
ADVERTISEMENT
Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.
A Russian expatriate and former professional sailboat racer, Katie Ananina, Plan B Passport — a firm that brokers citizenship through investment schemes for tax-haven nations that don’t impose capital gains on crypto holdings to wealthy investors.
According to a July 11 report from CNBC, Plan B brokers hundreds of passports for predominantly western clients each year. Customers select from one of seven jurisdictions: Saint Kitts and Nevis, Antigua and Barbuda, Dominica, Vanuatu, Grenada, Saint Lucia, and Portugal.
“If the government starts affecting me, I will take all [my assets] into my hands and go elsewhere,” said Ananina, adding:
“I was smart enough to figure out that $200 in bitcoin will be worth $100,000 at some point. I don’t think the government should have 40% of that.”
The safe-haven states offer citizenship through investment schemes requiring six-figure investments into local businesses, real estate, or government bonds. Some jurisdictions accept payment as donations, with Ananina estimating most passports cost between $100,000 and $150,000.
“It’s basically a donation into the sustainable growth fund of the country. So, clients make a $100,000 or $150,000 donation, plus some due diligence fees, government fees, and then $20,000 for my legal fees,” she said.
Plan B’s clients will also incur exit taxes should they revoke their existing citizenship.
Ananina became a Bitcoin maximalist after witnessing a 50% crash in the price of Russian rubles while living in Spain and competing for Russia’s national sailing team in 2015.
“My macroeconomics professor wasn’t able to explain that to me. There was no chance I could run my equations and figure out what happened there. I realized I wasn’t happy with how money works.”
Related:2020’s 5 countries friendliest to crypto and blockchain
Citizenship through investment schemes have come under increasing scrutiny recently, following a series of investigations by Al Jazeera that revealed wholesale corruption among the officials overseeing the programs in Cyprus and the Caribbean — with some Caribbean states being found to offer diplomatic passports for the right price.
Cyprus abolished its citizenship through investment scheme in October 2020.
The South Korean administration is not relenting on its quest to levy a 20% income tax on capital gains from crypto transactions in 2022, despite growing investor concerns for the taxation plan to be delayed.
Crypto gains will be classified as “miscellaneous income”
During a vice-ministerial interagency meeting, the South Korean government revealed that its 20% income tax plan on cryptocurrencies would continue to implement next year.
Koo Yoon-cheol, the head of government policy coordination under the Prime Minister’s office, chaired the meeting. He noted:
“Gains from cryptocurrency transactions will be classified as ‘miscellaneous income’ and will be subject to a 20 percent tax starting next year. Virtual asset gains must be reported when filing for general income taxes in May 2023.”
The Financial Service Commission, the nation’s monetary watchdog, is responsible for regulating and overseeing the cryptocurrency market. On the other hand, the science ministry is mandated with boosting the growth of the blockchain industry.
Special governmental campaign against illegal crypto activities
It also decides that the relevant authorities would extend the special governmental campaign time frame for cracking down and monitoring unlawful crypto activity to September 2021.
In February this year, the South Korean Ministry of Economy and Finance announced that investors making at least 2.5 million won, or approximately US$2,260 from crypto trading, would be subjected to the 20% income tax. It also pointed out that crypto inheritances and gifts would also be taxed. In such cases, the calculation of asset price would be based on the daily average price for one month before and one month after the date of the inheritance or gift.
Crypto taxation has been a burning issue in South Korea since the nation’s parliament last year brought up the crypto taxation bill.
Therefore, cryptocurrency investors find themselves in a difficult position because of the heavier taxes imposed on their gains than with stock investment.
The South Korean administration is not relenting on its quest to levy a 20% income tax on capital gains from crypto transactions in 2022, despite growing investor concerns for the taxation plan to be delayed.
Crypto gains will be classified as “miscellaneous income”
During a vice-ministerial interagency meeting, the South Korean government revealed that its 20% income tax plan on cryptocurrencies would continue to implement next year.
Koo Yoon-cheol, the head of government policy coordination under the Prime Minister’s office, chaired the meeting. He noted:
“Gains from cryptocurrency transactions will be classified as ‘miscellaneous income’ and will be subject to a 20 percent tax starting next year. Virtual asset gains must be reported when filing for general income taxes in May 2023.”
The Financial Service Commission, the nation’s monetary watchdog, is responsible for regulating and overseeing the cryptocurrency market. On the other hand, the science ministry is mandated with boosting the growth of the blockchain industry.
Special governmental campaign against illegal crypto activities
It also decides that the relevant authorities would extend the special governmental campaign time frame for cracking down and monitoring unlawful crypto activity to September 2021.
In February this year, the South Korean Ministry of Economy and Finance announced that investors making at least 2.5 million won, or approximately US$2,260 from crypto trading, would be subjected to the 20% income tax. It also pointed out that crypto inheritances and gifts would also be taxed. In such cases, the calculation of asset price would be based on the daily average price for one month before and one month after the date of the inheritance or gift.
Crypto taxation has been a burning issue in South Korea since the nation’s parliament last year brought up the crypto taxation bill.
Therefore, cryptocurrency investors find themselves in a difficult position because of the heavier taxes imposed on their gains than with stock investment.
What are the basics that everyone should know about how their bitcoin is taxed in the United States?
Is the purchase of bitcoin taxable?
Do you pay taxes on the sale of bitcoin?
What transactions require me to report my Bitcoin?
These are questions nearly every Bitcoiner has asked themselves at some point in their Bitcoin journey. The topic of taxes and bitcoin can seem daunting at first but, once you have a solid understanding of the tax implications you may have around your bitcoin, you can make better decisions to lessen the burden of the good ol’ government. I have been working under one of the top Bitcoin tax experts in the country over the past year and have learned everything there is to know about Bitcoin and taxes. I can attest, knowing the regulations and laws around taxes on your Bitcoin can help make a big difference in how you utilize it.
Is There A Bitcoin Tax?
There is not actually anything called a “bitcoin tax” per se. When people refer to taxes and bitcoin they are referring to the capital gains taxes one must pay on profits made from selling or trading bitcoin. This is because, under the current view of the IRS (seen in IRS notice 2014-21), bitcoin is considered property. Per notice 2014-21 the IRS states “for federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” This really means the capital gains tax on Bitcoin is no different than the one referred to from profiting off a stock.
Capital gains have different rates you pay based on your income level as well as the holding period for the bitcoin.
Capital Gains Taxes: Short Term vs. Long Term
Capital gains taxes are split up into two groups, short term and long term, depending on how long you’ve held the asset.
Short-term capital gains tax is applied to profits from selling an asset you’ve held for less than a year. Short-term capital gains taxes are pegged to where your income places you in federal tax brackets, so you’ll pay them at the same rate you’d pay your ordinary income taxes.
Long-term capital gains tax is applied to assets held for more than a year. The long-term capital gains tax rates are 0%, 15% and 20%, depending on your income. These rates are typically much lower than the ordinary income tax rate, which is why HODLing is always going to be the most tax efficient strategy.
The pictures below represent the current long- and short-term capital gains tax rates in the United States.
Internal Revenue Service
Internal Revenue Service
Keep in mind, there are also varying state tax rates that get applied to capital gains. These can range anywhere from 3%–10%.
Capital Losses
If you sell bitcoin at a loss, meaning if the price you sold at is lower than your purchase price, you are entitled to a tax loss deduction, lowering your overall tax bill. You can deduct up to $3,000 per year from capital losses or use it to offset a portion of your capital gains. Any capital loss that exceeds $3,000 will roll forward to following years and can help offset future gains.
For example, If you lost $6,000 in 2020, you would deduct $3,000 from your 2020 income, reducing your tax bill and be able to deduct another $3,000 in 2021, or if you had gains in 2021 you could reduce your gains by that $3,000.
What transactions are taxable?
Understanding what transactions are taxable is very important for planning ahead and making smart decisions about how to best utilize your bitcoin. Let’s break down what is and is not a taxable event.
Taxable: Anytime you trade, spend or sell your bitcoin, you are triggering a taxable event which must be reported to the IRS. You are also required to report any bitcoin mining as taxable income.
Non-Taxable: HODLing, purchases of bitcoin with fiat, sending bitcoin from one wallet or exchange to another, using bitcoin as collateral are all non-taxable events.
What is the best tax method?
I recommend using FIFO (first-in first-out) to most of if not all the clients I work with. This essentially means that the first coins you purchased will be the cost basis and holding period for the coins you decide to sell, spend or trade. FIFO is always favorable for Bitcoiners because it allows you to qualify for long-term capital gains rates easier.
How are capital gains tracked for bitcoin?
Tracking capital gains and losses can be quite tricky depending on how much activity you have had with your bitcoin. Moving and storing bitcoin on different wallets and exchanges can lead to quite the headache when trying to figure out the cost basis and holding period for the coins you decide to trade, spend or sell. Luckily, there is software out there like Cointracking.info (my personal favorite) that allows you to easily import your data and does the calculations for you. Once you have calculated your gains/losses either via a software or by doing it yourself, you then report the numbers on form 8949. These figures flow through to schedule D on form 1040.
My suggestions:
My biggest suggestion to any client is to keep track of everything in a notebook and try to use only a few fiat on-ramps and a few secure hardware or multisig wallets. This will make the whole process of calculating your gains/losses much easier. I also recommend not selling your bitcoin until it becomes the unit of account, however, I understand everyone has expenses and reasons to sell along the way. A good way to work around this is by putting your bitcoin up as collateral with a company like Unchained Capital. Just as long as you aren’t selling your bitcoin to buy an Aston Martin.
Hopefully, this article has given you a better idea of how taxes might affect you, so you can make better decisions and minimize your payments to the greedy government. If you need help navigating your bitcoin taxes or just want to ask questions, feel free to shoot me a Twitter DM (located on author profile page) anytime.
This is a guest post by Joe Howe. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
This tax season, it may be worthwhile to consider making a bitcoin donation to reduce one’s taxes through philanthropy.
This year is on track to be a record year for bitcoin donations as more donors continue to learn about the tax benefits of donating bitcoin instead of fiat. Why do so many high-networth individuals make large gifts of equities or bitcoin instead of donating in fiat? It’s usually all about taxes. If you donate bitcoin, which is considered property by the IRS for tax purposes, then donating appreciated bitcoin is likely one of the most tax efficient ways to support your favorite bitcoin-friendly charity. Why? Think about it like donating pre-tax dollars. When you donate bitcoin directly to a 501c3 nonprofit, you (the donor) do not owe capital gains taxes and can write off the fair market value of the donation. If you were to sell your bitcoin and then donate afterward, you’d be paying 30% or more in taxes first and then donating less as a result. Plus your write-off would be lower as well since the donation is smaller. Since the nonprofits are a 501c3, they also don’t have any tax liability on the gifts and are better off as well.
For those of you who want to take it one step further, there is also a tax arbitrage opportunity since there is no wash rule related to crypto donations. This only helps you if you’re already donating fiat but have appreciated bitcoin you’re HODLing. You might need to read this next paragraph more than once because this is a little more complex.
So, say you’re already donating $10,000 per year to your favorite charity using your credit card. If you replace that $10,000 donation with an equivalent bitcoin donation, and use the fiat to purchase back your bitcoin position, you’ve now erased your capital gains on the previous positions and raised your cost-basis. So by making that same gift in bitcoin each year and then repurchasing that same amount using the fiat you would have donated, you’re much better off.
Unfortunately, most Bitcoiners don’t know about the tax benefits of donating appreciated bitcoin, but if you ask your financial advisor or accountant, they’ll likely tell you to donate your most highly appreciated assets (like bitcoin) first. Until recently, stock donations weren’t easy so this was usually a strategy reserved for the mega wealthy. With bitcoin being easier to transfer and hundreds of nonprofits accepting bitcoin donations directly, it’s becoming more common for the average person to support their cause in a more tax efficient way by donating bitcoin.
To help raise awareness and promote bitcoin donations, The Giving Block has launched a Tax Season campaign that aims to educate users on the tax benefits of donating appreciated bitcoin. Although I’m biased toward making a donation, there are a handful of ways to reduce your bitcoin taxes beyond making a donation. Other methods include
Using tax software to automate tracking your transactions
Working with tax professionals who do the heavy lifting for you
Moving to a city like Miami that is in a state that doesn’t have personal income taxes (plus they have a bitcoin-friendly mayor!)
So whether you’re moving to Miami to get a tan and save on taxes or donating bitcoin to a charity, we hope you take the time to plan ahead or consult a tax professional to optimize your HODL plan so you can stack as many sats as possible.
This article does is not tax advice nor financial advice – all parties should do their own research when making any financial decisions.
This is a guest post by Alex Wilson. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
President Joe Biden is considering raising the U.S. capital gains tax rate by nearly double for the wealthiest Americans to pay for agenda items, according to Newsweek. Naturally, any raise in capital gains taxes would have significant impact on bitcoin investors that have seen the value of their assets rise exponentially in recent years.
According to Newsweek, the tax increase seeks to help fund Biden’s American Families Plan, a proposal set to be finalized and presented sometime this week. It aims to allocate “$1.5 trillion in new spending and tax credits meant to fight poverty, reduce child care costs for families, make prekindergarten and community college free to all, and establish a national paid leave program,” reported The New York Times.
An analysis recently published by the Tax Foundation further analyzed how the new federal tax rates could play out at the state level. It shows that “[rates] would be even higher in many U.S. states due to state and local capital gains taxes, leading to a combined average rate of 48 percent compared to about 29 percent under current law.”
If enacted, “Biden’s plan would be the highest tax rate on investment gains since the 1920s,” per Newsweek.
Naturally, such a high capital gains tax rate would influence taxpayers’ decisions regarding when to sell their assets and in which state they choose to live. According to the Tax Foundation, if enough taxpayers decide not to realize gains and avoid the new tax rate, Biden’s move could backfire, resulting in less federal revenue altogether.
Although traditional investors might avoid the tax increase for some time, Bitcoiners are in a unique position. They might see Biden’s potential plan as the ultimate incentive for not selling their bitcoin and not realizing any capital gains.
Already accustomed to the “HODL” motto, Bitcoiners would be more incentivized than ever to hold on to their bitcoin until hyperbitcoinization, at which point the IRS would cease to exist as the USD is replaced by a Bitcoin standard. And, until then, if they ever need some dollars, they can loan a small portion of their bitcoin stack for a fee, rather than selling it and incurring tax obligations.
