April 4, 2018
by Sharon Moran
The tax deadline for U.S. residents is quickly approaching, and anyone who has bought, sold, mined, or traded cryptocurrencies in 2017 has special tax considerations to keep in mind. This also applies to individuals who used bitcoin or other cryptocurrencies to make purchases because using a cryptocurrency to buy an item is considered a taxable event as well.
The “bitcoin loophole” that once existed is now obsolete. It ended on December 31, 2017, with an amendment to Sec. 13303 of H.R.1. bill, clarifying that exchanging one cryptocurrency for another is not a like-kind exchange. Prior to this legal clarity many cryptocurrency investors and traders mistakenly and very broadly interpreted that a taxable event was only triggered when they “cashed out” to fiat currency. A tax obligation is triggered when cryptocurrency investors exchange one type of cryptocurrency for another. Yes, this even includes cryptocurrencies that are based on the same algorithm or one currency that is a fork of another.
Enlist the Help of a Cryptocurrency Tax Professional
It’s advisable to contact a tax professional who is knowledgeable about cryptocurrency legislation and the applicable IRS tax guidelines. Of course, you could always go it alone. The IRS does publish documentation Visit irs.gov for Form 8949 and the corresponding instructions on how to complete it. If you make a mistake filing, the IRS does offer taxpayers the option of filing an amended return, so you don’t need to be absolutely perfect on the first try or have an accounting degree to file your own return.
The First Bitcoin Miner in History Intentionally Overpaid His Taxes
If you or other cryptocurrency investors you know choose to ignore or creatively interpret U.S. tax law regarding cryptocurrencies, do so at your own risk. Individuals who argue that the IRS can’t possibly keep track of every tax filer who misrepresents cryptocurrency income or related capital gains are disregarding and neglecting the spirit of early bitcoin miners, particularly Hal Finney. Bitcoin was, in part, successful because of the efforts of early bitcoin miners, and Hal Finney was the very first. He was also the recipient of the very first bitcoin transaction from bitcoin’s pseudonymous creator, Satoshi Nakamoto.
In his book Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money, author Nathaniel Popper wrote the following about Hal Finney, “Ironically for a person so eager to create new money, Hal’s interest wasn’t primarily financial. The programs he was writing, like PGP, were explicitly designed to be available to anyone, free. His political distrust of government, meanwhile, was not driven by selfish resentment about paying taxes. During the 1990s Hal would calculate the maximum bill for his tax bracket and send in a check for that amount, so as to avoid the hassle of actually filling out a return.”