5 Big Ways The New Tax Laws Change Cryptocurrencies

by Trading 101     Jul 16, 2019

Cryptocurrencies are a new form of commodity that the world admittedly has very little experience with. It doesn't have a physical representation like most other assets do and can be a little hard to wrap one’s head around - which is also true for governments and institutions. In fact, several governments have already started cracking down on the digital money, some going as far banning it entirely, in response to the fact that they have no power to control the currencies. America is an interesting case, especially with the recent tax law being signed into law by Donald Trump. There are 5 big parts of the bill that could have an impact on crypto, which aren’t exactly the kind of things you’d learn in an average trading 101 tutorial. The tax bill does not directly address cryptocurrencies, but does address some aspects of crypto directly.

  1. Like-Kind Exchanges

This is likely the most interesting part of the tax bill - a quick search on this on the internet will largely point you at section 1031 of the tax code, “which allows capital gains taxes to be deferred for certain “like-kind” exchanges of property for other, similar property.” This part of the bill was originally intended for farmers who were trading livestock for other types of livestock, it has been heavily made use of in real estate, art and the aviation industry. It used to also be applicable to crypto in a sense - for instance, the trade of crypto for another cryptocurrency could be seen as a like-kind type of exchange. However that has changed, and most experts believe the IRS will not see crypto as eligible to be covered by the law, since trading one stock on the market for another also does not qualify. No tax break gained here miners, and if there’s one thing for you to remember from trading 101, it’s to not mess with the IRS.

2. Loss Carrybacks

This section is one of the parts of the new tax law that’s going to directly affect companies that are raising money through ICOs. Many folks who were going to raise money in 2018 and then generate an operating loss in 2019 and then use that loss to offset the income from 2018 and get out of paying tax are not going to be able to do that any longer. This one’s pretty clear cut, so currency builders have to get more creative.

3. Corporate Tax

One of the big talking points in the new tax bill is the significant cut to top corporate tax rates, dropping the highest one from 35% down to 21% which is a tremendous drop. And long-term capital gains tax maxes out at 20% for corporations, which means it might actually be feasible and worthwhile to incorporate a small company to do crypto trading through instead of using personal accounts due to the lower tax rate.

4. Deduction for Pass-through entities

Pass-through entities are companies that pass income directly to the owners or founders of the company. While this has little effect on crypto traders, this could be a large boon for the crypto miners, especially since crypto mining is not a cheap business to be in.

5. Misc. personal deductions

2% of deductions which one could claim on itemized amounts which exceeded 2% of adjusted gross income - are now no longer part of the law. No more deductions to be claimed on the travel to expensive conferences or other purchases of cold wallets that used to be deductible. The recommendation here is to definitely approach all expenditure carefully to figure out if there are any things that are still tax-deductible, but this change to the tax law has certainly made life as cryptocurrency investor more difficult and expensive.

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