Capital Gains Tax & Cryptocurrency - Is it Just Too Complicated?
If you use U.S. tax filing service Credit Karma to prepare and file your taxes, you may want to think twice about doing so. - At least if you invest, trade, or hold cryptocurrency.
April 15th saw the passing of the filing deadline for U.S. federal income tax returns. Just a few days later, though, Credit Karma was quick to reveal that fewer than 100 out of 250,000 filings processed by them, had seen taxpayers declare any capital gains tax on standing cryptocurrency investments.
Needless to say, if Credit Karma has already identified who should have disclosed capital gains tax on cryptocurrency but hasn’t, the IRS likely has also. There is just one question. - Namely, are taxpayers purposefully giving the tax man the run around? Or are new capital gains tax rules simply too complicated for average investors to get their head around?
How Capital Gains Tax on Cryptocurrency Works
Credit Karma and the IRS might be ringing an alarm bell over cryptocurrency tax evasion. In reality, though, many people who bought or held on to cryptocurrency throughout 2017, won’t actually be liable to pay a penny.
Put simply, current U.S. capital gains tax rules stipulate that capital gains tax on cryptocurrency only becomes payable when investors trade or sell cryptocurrency holdings. This being the case, if you bought Bitcoin in 2016 and held throughout 2017 as you saw prices soar all the way up to $20,000, you don’t owe the IRS anything.
Where Capital Gains Tax Gets More Complicated
Where capital gains tax on cryptocurrency gets more complicated, is when assets are traded, cashed out for fiat cash, or even so much as transacted in any way. This means that if you invested $100 in cryptocurrency in 2013 and decided to treat yourself to even so much as a takeaway in 2017, you owe the IRS capital gains on that transaction.
Why Cryptocurrency Traders & Investors are Avoiding the IRS
By far the biggest injustice of the current capital gains tax system regards the fact that if users report gains followed by considerable losses, they will still be liable to pay any earlier declared gains. - (Even if that means taking out a loan).
Is There a Way to Sidestep IRS Cryptocurrency Tax Legally?
The easiest way to avoid the purposeful complexity of capital gains tax in the U.S. is to either HODL or consider relocating.
Due to public outcry regarding high tax rates and needless reporting complexity, the Council of State in France has just slashed capital gains tax on cryptocurrency to a flat rate of 19%. This means that retail cryptocurrency traders and everyday investors can keep easier track of their true tax liabilities. - This and arguably feel more inclined to declare tax rather than sidestep their reporting obligations.
Why Capital Gains Tax Might be a Ticking Time Bomb for U.S. Traders & Investors
At present, the IRS in the U.S. has made no effort to clarify reporting obligations for citizens in regard to cryptocurrency. Investors and traders are simply encouraged to seek advice from professional tax advisors should they encounter confusion. Much more importantly, though, it is far from clear how exactly the IRS plans to monitor cryptocurrency users trading and transaction history.
Can the IRS Track Users or Can't It?
Because non-payment of state and federal taxes can lead to a lengthy prison sentence, all cryptocurrency users are advised to assume that the IRS already knows their exact trading history. At the same time, however, only Coinbase is known to officially share user information with the IRS.
Of course, this can lead to the assumption that traders and investors who don’t use Coinbase can keep a low profile. What is worrying though, is that as demonstrated by the recent announcement by Credit Karma, the IRS seems content to simply assume it knows peoples cryptocurrency spending, trading, and investment behavior.
Put simply, even if you haven’t declared anything this year due to losing private keys or having only cashed out $7.99 BTC to buy a pizza, the taxman may come a knocking eventually. - Especially if he knows that by not declaring your $7.99 pizza purchase, he can hit you with a hefty fine or a 5-year federal prison sentence.