The Wolf Den - 2019 Crypto Tax Edition
How The United States Views Crypto
The United States has become one of the least crypto friendly countries in the world. The IRS views crypto currency as property, not as money, stock or a security. This is bad for people that actually use Bitcoin or other crypto on a regular basis to transact, because it means that every single time you use it you are "selling" Bitcoin and it is a taxable transaction. It is absurd, especially considering that much of the initial appeal of Bitcoin was that the tax laws were liberal or altogether undefined. Now, if you buy a cup of coffee with your Bitcoin, you are technically "selling" it, and have to calculate your cost basis of the purchase and pay taxes on the "profit." This makes using crypto for transactions unattractive and effectively pointless.
Further, when you buy an altcoin with Bitcoin, you are "selling" Bitcoin, which is taxable. You are taxed once again when you sell that altcoin back to Bitcoin, creating a seemingly endless series of taxable transactions to calculate (Bitcoin.tax makes this simple, more below). More importantly, you can lose Bitcoin on the altcoin trade, but still owe taxes on the "profit" because of the price of Bitcoin Vs. USD. A friend of mine took a sizable loss trading crypto in 2018, but still found out that he owed tens of thousand of dollars in taxes. Insane.
The hidden advantage which he missed (and this is up for debate) of Bitcoin being viewed as property is that certain securities rules do not apply - namely the laws regarding wash sales. From Investopedia:
The wash-sale rule is an Internal Revenue Service (IRS) regulation established to prevent a taxpayer from taking a tax deduction for a security sold in a wash sale. The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss and, within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so. A wash sale also results if an individual sells a security, and the individual's spouse or a company controlled by the individual buys a substantially equivalent security.
It is illegal to sell a stock to take a tax write off and buy it back within 30 days. As of right now, this law does not apply to crypto. That means that you can sell a coin before January 1st at a loss as a tax write off, or hopefully to help offset the taxes on some of your gains. As of now, there is no law against buying this back on January 1st.
Wash sale laws aside, if you have positions that are underwater you can exit them before the strike of midnight and potentially improve your tax situation. If you want to be extra safe and still want to own that coin, you can wait 30 days to buy it back. If you are not particularly married to the position, you can sell today, take the write off and move on to better investments or trades. At the most basic level, if you need a tax write off or to offset some gains, today is the best day to do it.
Here is a great article from Forbes with some year-end tax tips for crypto traders and investors. This further discusses the wash sale rule.
Bitcoin.Tax
As mentioned above, calculating the profit and loss on all of your trades and transactions is nearly impossible, especially since you have to account for the value in USD at the exact moment of each transaction. Luckily, there are platforms out there that do all of the heavy lifting for you. I use Bitcoin.Tax. This is an ESSENTIAL platform for doing taxes. I execute thousands of trades a year and they calculate what I owe accurately within a few minutes. It's amazing and cheap ($29.95). They were kind enough to offer 10% off to my followers.
Use this link for the discount (I don't get anything from this)
Bitcoin Yearly Chart
This is the Bitcoin yearly chart, taken from one of the older exchanges - Bitstamp. Why would I share this? To illustrate how new Bitcoin still is and how little price history and action we have to analyze. Further, you can see that Bitcoin has only ever truly been in an uptrend and this year's green (grey) candle is likely to end the temporary down trend from last year's red candle. When I zoom out, all I see is tremendous potential for Bitcoin in the coming years. Don't get lost on small time frames - always keep the big picture in mind.
And with that, I wish you a great holiday! See you in a few days.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor.