Fellas,
I've recently retained a local tax attorney who's been into crypto since January and is looking to specialize in the field.
Together, we've done some research into what little guidance the SEC and IRS have put out regarding cryptocurrencies, and I've used this data to help form my investment strategy when it comes to managing my crypto portfolio.
Keep in mind I'm a U.S. citizen; this will of course differ by country and likely even by state within the U.S.
Please consult a local professional yourself before making any financial decisions. I am not a financial or legal adviser and any investment decisions you make are done entirely of your own volition.
That being said, there were two big takeaways for me.
1) Currently the IRS classifies cryptocurrencies as property (NOT currencies, or securities like stocks/bonds), and as such any profit derived from the sale of crypto assets is subject to capital gains tax.
Sell within a year of purchase = short-term capital gains, which are taxed as income at whatever bracket you happen to fall under.
Sell after holding (hodling?) for at least a year = long-term capital gains, 15% for most people (20% for the top tax bracket, and it's actually 0% for those in the two lowest brackets!)
So ideally, one would wait at least a year from the purchase of a crypto asset to sell in order to pay long-term capital gains taxes on the profit.
2) Because cryptocurrencies are classified as property, crypto-to-crypto trades fall under IRC Code Section 1031 concerning "Like-Kind Exchanges".
Basically, if you sell Bitcoin for Ethereum (or make any other crypto-to-crypto trade) it is NOT a taxable event. The only time you're taxed is when you cash out to fiat (USD).
Cashing out to fiat also means the next time that money gets put back into crypto, the capital gains timer restarts (and you establish a new cost basis for your potential profit). So in order to minimize taxes you'll want to keep your money in crypto/avoid cashing out to fiat for at least one year post-purchase.
This brings up the obvious question: while crypto over the long term has the potential to disrupt multiple industries and take over the world, many (myself included) believe the market as a whole to be in a short term bubble (I'd put us somewhere between "Media Attention" and "Enthusiasm").
So is there any way of selling/escaping the volatility of crypto assets without actually cashing out to fiat?
The short answer is "yes," although I'm still researching this and would appreciate help from anyone who may have a better solution.
My current plan is to utilize a cryptocurrency called Tether (USDT), which is pegged to the value of the US dollar.
Tether is paired with most major cryptos on Poloniex (the top crypto-only exchange) and can be cashed out 1:1 for USD either through the Tether company itself or via other exchanges that host it (Kraken I know does, I'm not sure about others).
Tether does charge some fees, but only if you redeem your USDT for actual dollars.
When it comes time to sell my crypto assets, my plan is to sell the alt coins into BTC or ETH (or anything paired with Tether) in order to sell those for USDT, which I'll then hold until it's time to either cash out (depending on when I hit that one year mark for long term capital gains) or start buying back once there's blood in the crypto streets.
From the reading I've done it seems that Tether has had some issues in the past. Wells Fargo and other banking partners temporarily stopped providing wires back in April (apparently it had something to do with KYC/AML regulations), and the value of USDT actually fell into the low $0.90s. So I'm still looking at other alternatives in addition to making sure that Tether remains a safe place to store value in the short-to-medium term. I'll update this thread as I learn more.
In the meantime, if anyone else has anything to add please do so. Just be sure to back it up with solid evidence; we don't want people forming trading strategies based on guesswork or assumptions.
And yes, I know the IRS has its head up its ass when it comes to crypto, and that many people will likely be able to avoid paying taxes entirely. But this industry just grew 10X in the last year (with few signs of stopping), and I'm sure it's only a matter of time before Uncle Sam comes around looking for his cut. I recommend everyone here keep a strict record of all your trades (dates, times, fiat and crypto amounts bought/sold, on which exchange, etc.) just in case.
Besides, anyone who's used an exchange to purchase assets likely had to provide enough personal info for the government to eventually track them down. Personally I'm going to pay all my taxes, but I'll pay as little as legally possible and then sleep well the rest of my life.
If anyone has questions, please post them here instead of shooting me a PM, so the rest of the Forum can benefit from the discussion (unless it's a private matter, in which case don't hesitate to reach out).
If you've found this information useful and want to leave me a tip:
ETH: 0x1C79221595B5c023492f03D8cD9f07c9d2aAf814
BTC: 18mC6knWHyVnfhCTWkHupUicQuHiS6T9vu
Thanks, and happy trading!
I've recently retained a local tax attorney who's been into crypto since January and is looking to specialize in the field.
Together, we've done some research into what little guidance the SEC and IRS have put out regarding cryptocurrencies, and I've used this data to help form my investment strategy when it comes to managing my crypto portfolio.
Keep in mind I'm a U.S. citizen; this will of course differ by country and likely even by state within the U.S.
Please consult a local professional yourself before making any financial decisions. I am not a financial or legal adviser and any investment decisions you make are done entirely of your own volition.
That being said, there were two big takeaways for me.
1) Currently the IRS classifies cryptocurrencies as property (NOT currencies, or securities like stocks/bonds), and as such any profit derived from the sale of crypto assets is subject to capital gains tax.
Sell within a year of purchase = short-term capital gains, which are taxed as income at whatever bracket you happen to fall under.
Sell after holding (hodling?) for at least a year = long-term capital gains, 15% for most people (20% for the top tax bracket, and it's actually 0% for those in the two lowest brackets!)
So ideally, one would wait at least a year from the purchase of a crypto asset to sell in order to pay long-term capital gains taxes on the profit.
2) Because cryptocurrencies are classified as property, crypto-to-crypto trades fall under IRC Code Section 1031 concerning "Like-Kind Exchanges".
Basically, if you sell Bitcoin for Ethereum (or make any other crypto-to-crypto trade) it is NOT a taxable event. The only time you're taxed is when you cash out to fiat (USD).
Cashing out to fiat also means the next time that money gets put back into crypto, the capital gains timer restarts (and you establish a new cost basis for your potential profit). So in order to minimize taxes you'll want to keep your money in crypto/avoid cashing out to fiat for at least one year post-purchase.
This brings up the obvious question: while crypto over the long term has the potential to disrupt multiple industries and take over the world, many (myself included) believe the market as a whole to be in a short term bubble (I'd put us somewhere between "Media Attention" and "Enthusiasm").
So is there any way of selling/escaping the volatility of crypto assets without actually cashing out to fiat?
The short answer is "yes," although I'm still researching this and would appreciate help from anyone who may have a better solution.
My current plan is to utilize a cryptocurrency called Tether (USDT), which is pegged to the value of the US dollar.
Tether is paired with most major cryptos on Poloniex (the top crypto-only exchange) and can be cashed out 1:1 for USD either through the Tether company itself or via other exchanges that host it (Kraken I know does, I'm not sure about others).
Tether does charge some fees, but only if you redeem your USDT for actual dollars.
When it comes time to sell my crypto assets, my plan is to sell the alt coins into BTC or ETH (or anything paired with Tether) in order to sell those for USDT, which I'll then hold until it's time to either cash out (depending on when I hit that one year mark for long term capital gains) or start buying back once there's blood in the crypto streets.
From the reading I've done it seems that Tether has had some issues in the past. Wells Fargo and other banking partners temporarily stopped providing wires back in April (apparently it had something to do with KYC/AML regulations), and the value of USDT actually fell into the low $0.90s. So I'm still looking at other alternatives in addition to making sure that Tether remains a safe place to store value in the short-to-medium term. I'll update this thread as I learn more.
In the meantime, if anyone else has anything to add please do so. Just be sure to back it up with solid evidence; we don't want people forming trading strategies based on guesswork or assumptions.
And yes, I know the IRS has its head up its ass when it comes to crypto, and that many people will likely be able to avoid paying taxes entirely. But this industry just grew 10X in the last year (with few signs of stopping), and I'm sure it's only a matter of time before Uncle Sam comes around looking for his cut. I recommend everyone here keep a strict record of all your trades (dates, times, fiat and crypto amounts bought/sold, on which exchange, etc.) just in case.
Besides, anyone who's used an exchange to purchase assets likely had to provide enough personal info for the government to eventually track them down. Personally I'm going to pay all my taxes, but I'll pay as little as legally possible and then sleep well the rest of my life.
If anyone has questions, please post them here instead of shooting me a PM, so the rest of the Forum can benefit from the discussion (unless it's a private matter, in which case don't hesitate to reach out).
If you've found this information useful and want to leave me a tip:
ETH: 0x1C79221595B5c023492f03D8cD9f07c9d2aAf814
BTC: 18mC6knWHyVnfhCTWkHupUicQuHiS6T9vu
Thanks, and happy trading!
