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Cryptocurrencies and How They Affect Your Income Tax

With all the talk about cryptocurrencies over the past year, it is hard to believe that less than ten percent of Americans are even invested in the crypto-market. Yes that is correct, less than 10%.

According to a recent study released by personal finance website by Finder.com, less than 8% of Americans are invested in the cryptocurrency market.  That being said, let’s talk taxes!  A couple of weeks ago, I was part of a panel of accounting professionals who spoke on issues that pertain to the cryptocurrency market as it relates to taxes.  The point of me mentioning this is to alert you to the debate surrounding cryptocurrency and taxation in the United States.

There has been a growing debate on how cryptocurrencies relate to income tax.  There are two schools of thought.  The first says that when one trades in the crypto-space (coin-to-coin in particular), that it can be considered a 1031 exchange.

A 1031 exchange or like-kind exchange is a tax-deferred exchange that allows for the disposal of an asset and the ability to acquire another similar asset without triggering a tax liability from the sale of the first asset.  In fact, with the 1031 exchange, a taxpayer would not pay taxes until an asset is sold and not exchanged for another asset.  This would mean that coin-to-coin trades would have to be reported but not taxed.

The second school of thought is that all crypto-trades (coin-to-coin, cash-to-coin or coin-to-cash) are all taxable and could not be considered a 1031 exchange transaction.

The first school of thought, in my opinion, is a more aggressive approach because the IRS and SEC have hinted several times in 2016 and 2017 as to their position in the crypto-space.  The second school of thought is the safer approach.  In fact, the latest tax law changes in 2017 only allow real property to be apart of the 1031 exchange.

For the crypto-traders reading this article these are the two schools of thought in terms of reporting income.  The last thing that some crypto-traders will have to consider is the Report of Foreign Bank and Financial Accounts (FBAR). Under the FBAR rules any American citizen that at any point during the year held more than $10,000.00 in a foreign financial account is obligated to report their holdings in that foreign account.

Many traders have money invested in foreign exchanges and should possibly report their holdings if their account values ever reach $10,000.00 or more at any point during the year.  I am thinking that some may have reached this mark in 2017, especially when the crypto-market appreciated greatly during the end of 2017.  The fines for not reporting could be $100,000.00 or 50% of the balance of the foreign account.

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About Frederick Towles

Frederick Towles is an entrepreneur, author and professional coach on personal finance, recognizing, seizing and leveraging opportunities of all kinds. Frederick founded The Towles Group Inc. to address issues that relate to small businesses and individuals – accounting, taxation, asset protection, financial compliance, wealth creation, debt management and business management. He also founded Unlimited Expectations Inc. which provides tools for individuals to assist them in the areas of opportunity recognition, leadership and personal finance. Through the tools and services offered by these companies people are positioned to operate their lives and their businesses at optimal capacity.

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