15 arguments against taxing cryptocurrency trades


#1

crypto-trading
via VB

Last year, Congress passed a law treating every crypto-to-crypto trade as a taxable event. That’s a mistake. Cryptocurrencies are too novel, fraught, and susceptible to unintended consequences to be taxed the same way as stocks and precious metals are. Here are 15 reasons why these trades shouldn’t be taxed.

1. Scam coins abound

A ponzi scheme, Bitconnect, once commanded a market cap of $2.8 billion; then it vanished overnight. Our tax policy rewards long-term holding, which is great when you’re hoarding Apple stock, but ruinous if you’re invested in a fly-by-night.

2. New blockchain tech emerges every week

The pace is blazing, and we need to give investors the flexibility to exit out of the laggards and move their investments into the disruptors. That’s how the mega-rich are minted, and we don’t want them all in Asia.

3. Tracking trades is a headache

There are dozens of exchanges and proprietary wallets, with more launching daily. Unlike bank accounts, which are static, traders need to actively shuffle their wallet addresses to stay secure. Logging this movement is a logistical nightmare, and some traders would rather risk an audit than bother.

4. We need more American exchanges

Why trade on an American exchange when you can hide your activity in Asia? Asian exchanges like Binance, Huobi, and OKEx are dominating American exchanges like GDAX and Bittrex in trade volume. And many new, promising entrants, like CoinSuper, are also based in Asia. Exchanges are a lucrative business; we should fight for their tax dollars.

5. A new type of exchange will elude the IRS

At this year’s Battle of the Cryptos event in NYC, a consensus trend prediction was the decentralized exchange. With an Asian exchange, the IRS might eventually gain access to their trading records. With a decentralized exchange, there’s no one to petition. Taxing exchange trades won’t work if there’s no way to audit them.

6. The future won’t have a paper trail

We can track most cryptocurrency movement today on public blockchains, but soon that won’t be the case. Privacy coins like Monero, ZCash, Dash, and Zen Cash obfuscate transactions by design. And Zen Cash is building the infrastructure for privacy-based, decentralized apps. Harsh tax treatment promotes a future with absolute privacy; we may even see Bitcoin or Ethereum add private transactions as a native feature. Combine private transactions with decentralized exchanges, and our tax policy operates on the honor system.

7. Many cryptocurrencies are clones of other cryptocurrencies

It’s unfair to pay taxes if you trade a coin for its exact replica or a slightly improved fork. Sometimes it’s not obvious which coin is the original and which is the copy. Recently, a government body claimed that Bitcoin Cash is the original Bitcoin and that what we call Bitcoin today is the fork.

8. Stablecoins complicate matters

I recently spoke with Zhuling Chen, the cofounder of Aelf, a top-100 cryptocurrency. He believes 2018 will be the year of the stablecoin: coins that are backed by fiat currencies or physical assets. Stablecoins raise a number of issues. For example, if you trade one coin that’s pegged to the dollar for another coin that’s pegged to the dollar, isn’t that like trading one dollar for one dollar?

9. Cost basis is a mess

Say you buy $1,000 worth of Bitcoin. A month later, you invest that Bitcoin in an ICO. What’s your cost basis for the ICO token? It should be the price of Bitcoin at the moment you sold it, but which price? Bitcoin is priced differently on different exchanges, and those prices can vary as much as 5-10 percent.

10. It’s impossible to buy most cryptocurrencies with U.S. dollars

In order to buy a smaller coin, you need to first buy Bitcoin or Ethereum. Platforms like Coinbase can take a week to process that purchase, so if the price of Bitcoin or Ethereum falls or rises in the meantime, that’s an immediate taxable event. Pain!

11. Middle-class investors suffer most

The wealthy are moving to Puerto Rico and other tax havens.

12. Hacking or accidental loss is an everyday affair

Say you were holding Bitcoin and someone hacked your wallet and used it to buy another coin. The IRS takes notice and taxes you as if you sold all your Bitcoin. There’s no way for you to prove that you didn’t make that trade. Similarly, if you intend to make a trade but copy-and-paste the recipient’s wallet address incorrectly, you’ve lost all your coins and the government will still stick you with a tax bill.

13. We’re putting unlucky traders in desperate straits

The market peaked in December and crashed in 2018. If you traded Bitcoin in December for a smaller coin and then that smaller coin tanked with the market, you could now owe more in taxes than your net worth, wiping you out. A gentler tax policy would give you a chance to recover.

14. Crypto-savvy tax professionals are hard to find and expensive

Good luck finding an accountant or tax lawyer who understands air drops, token sales, forks, stablecoins, mining, staking, and whatever else will be invented next week. Those professionals exist, but they come with a steep price tag.

15. It’s not working

No one is declaring their cryptocurrency profits. Threats, penalties, and complex rules are falling flat. Why not try simplicity and leeway?

The more sensible alternative is clear. Tax cryptocurrency only when traded for another asset class, like dollars or gift cards or Teslas. Then we give investors the flexibility to dodge scams, the boldness to bet on the next big idea, the incentive to trade on an American exchange instead of an Asian or decentralized one, and the chance to recover if they lose big in a crash or get hacked. As a bonus, more people will voluntarily declare their profits, and that will matter a lot in the future, because we won’t be able to police those profits anyway.


#2

This is incorrect- you know how many Bitcoin returns I completed for 2017? I am in a pool of other tax professionals and they are filing a lot more than me as well.

Before the IRS started cracking down- 800+ people reported. I imagine that number is going to be much higher this year.


#3

Rebecca,
I’m with John. It’s not working. 800 people out of how many millions of Americans? Granted not every American owns Bitcoin but 800 might as well be less then 1/10 of 1 percent. It’s not working. And furthermore every one of John’s arguments are valid! If I invest in a coin and it goes up. And then I file my taxes and I pay on that gain. And then the following week I go to cash out and the coin is now worthless. Is it really fair that I paid on a gain I never actually realized? NO! A hundred times NO!

I think people should be taxed on their cryptocurrency gains at the point of conversion back to fiat. They keep track of how much money they invest into crypto. That’s fairly painless. I can look at my Coinbase account or my Bank Account to easily come up with that sum. Then I subtract that amount from the amount of fiat I bring back into my bank account by cashing out crypto. Whatever the difference is I claim the gain or loss on my taxes. Why can’t we have a SIMPLE tax law for a change? Why does it have to so damn complicated? I personally think we should completely do away with all INCOME tax period! Tax people at the point of consumption with a federal sales tax. Simple. Done. And the hard working folks that make America hum. The hard working folks that keep this country great and wealthy. The hard working folks that choose to save the majority of their income. They pay only on what they spend. This would encourage people to save. Which would be a good thing for this country. But alas, my suggestion makes too much sense so it will never be implemented. Yosef.


#4

Well remember when 800 people filed- not a lot of people was in Bitcoin back then either. Nor did many of them understand that they had to pay taxes (I have a few of those clients now having to pay back thousands because they were unaware). That number has risen a lot now and I am sure the tax filings will correspond. Tons of software out here make it easier to report taxes AND exchanges are collecting information which could be given to the IRS.

And I disagree with you- the gain was realized. That is how people are able to purchase more alts. This is how they are also able to report losses, if their crypto lost value when it was converted. This is also how people are able to use their BitPay card to pay for items such as groceries, a cup of coffee, etc.


#5

But really I am not here to argue- I know this is a touchy subject for folks. I just know I am paying my crypto taxes because I don’t want to be the example the IRS is going to make. Blockchain isn’t anonymous- they are using all the information available to go after folks. I don’t look good in an orange jump suit.


#6

I’d like to see the IRS just tax the USD you put in vs the USD you cash out. Pretty simple.


#7

What about losses, Seems like all of these taxes are only talking about profits and exchanging as taxable events. I’m curious if I bought BTC at 10K but then found a coin I wanted to exchange my BTC for…for example EOS. If my BTC is currently at 7K that is a loss of 30% in the exchange. That should be able to be written off as well to offset other gains made.

Also, what about exchanges in investments. If I used crypto (my investment) and decided to purchase real estate (also my investment) that should be a tax neutral event. I can do that with my IRA and 401K so why would Crypto be different.


#8

If the loss is realized, it will offset your gains. Any excess loss can go against taxable income up to $3K per year.

“Tax neutral” events - section 1031 are limited to real estate only, one building for another.
Using crypto to buy real estate will be a taxable event. Maybe look into self directed IRAs and crypto to see if that can help.


#9

Technically it already is taxed by the time you put it in. Its income.


#10

Can we make this a petition??? I’ll sign.


#11

Unfortunately, I have to agree with Rebecca. I was not always on this mindset but I have come around, rather do this now and have a bigger mess to deal with later, it wont be worth it. Like many things in life, it is what it is. We already will be realizing ridiculous gains being this early in the market. I would rather keep all that money too than piss it to the govt, unfortunately, the govt is still the godfather and we have to pay our dues.