No More ‘Digital Gold’ — Dissecting The Tax Bill’s Impact on U.S. Crypto Traders

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For almost four years, whenever intra-cryptocurrency trades were conducted by U.S. Citizens, the IRS viewed such trades as ‘like-kind’ exchanges just as in real estate or fine art. For example, say you bought some Bitcoin and it went up in price (pretty likely if you purchased Bitcoin at any point in the last 18 months), then you decided to trade that same Bitcoin for an equivalent amount in Ethereum directly, without first selling into U.S. dollars. In this case, you could defer taxes on your Bitcoin capital gains for up to 18-months, which is a huge deal if you frequently traded across different cryptocurrencies.

However, on December 20th, 2017 the passing of the republican tax bill changed this tax benefit by requiring the payment of short term capital gains tax on intra-crypto trades in accordance with your income tax bracket. Perhaps easing the pain just slightly, the top marginal income tax rate is now capped at 37 %, down from the previous maximum of 39.6 %.

More explicitly, the implications of the tax bill on intra-digital asset trades is summarized as follows: Before December 20th, if you purchased Bitcoin at time t for price p and then traded your Bitcoin at a later date t’ for a higher price p’ (p’ > p), as long as you traded your Bitcoin for Ethereum or another digital currency you would have been able to defer taxes you would have owed on p’ - p which represents the capital gains on your Bitcoin. Following December 20th, 2017 those capital gains are no longer deferrable and are deemed as realized and taxable.

Bitcoin has always presented a classification challenge: Is it a currency? A store of value analogous to ‘digital gold’? Or is it an entirely new instrument defying analogy and undermining metaphors?

The answer to this question has always been contingent on who you ask and when you ask it. As Bitcoin barreled its way into the public consciousness for the first time in 2013, the consensus media and mainstream perspective was that this was a new way of paying for goods. In other words, a new kind of currency that derived its value from the utility it offered holders to buy stuff. This perspective made sense at the time, there was an explosion of companies and service providers that began accepting Bitcoin as a means for payment. Microsoft, Paypal, and others press released announcements that digital coins were as good as any tender.

The IRS, for the purposes of tax collection, historically defined Bitcoin and cryptocurrency a bit differently.

Back in March 2014, the IRS declared Bitcoin and Digital Currencies an asset class equivalent to traditional hard assets such as gold, real estate and art work. At the time, the total cryptocurrency market cap was somewhere in the neighborhood of $1B. Approximately, .17% or 1 / 600th of the market cap today (~$600B as of late December 2017). Additionally, the intra-cryptocurrency trading market was pretty negligent, Bitcoin was far and away the dominant cryptocurrency in terms of market cap and the notion of a major “alt-coin” exchange market had yet to take hold.

Recently, the average daily trading volume of cryptocurrencies surpassed that of the New York Stock Exchange, the revenue implications for the IRS have certainly helped to shift their perspective to favor a different, more lucrative, classification.

Stanford B.A. Economics. Former Hedge Fund Manager. Author: God Money (book in progress). Follow me:

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