The answer is, “Maybe” but we might all go to jail for money laundering as well.
A brief search through the various bills introduced by the 115th Congress reveals at least 15 which at least mention cryptocurrency, digital currency, or virtual currency. Their topics are as widely varied as the ICOs being pumped out now on an almost daily basis.
These bills range from Senate Bill S722 – Countering Iran’s Destabilizing Activities Act of 2017 to HR 4530 – GAME Act of 2017, which essentially includes language that gambling with “virtual currencies” will be subject to the same rules and regulations as gambling with fiat currency.
It does seem somewhat ironic that the official IRS stance still maintains that cryptocurrency is property while our legislators identify it as having similarities with other forms of currency. I guess, technically, you could go out and bet your house (aka “property”) on a wager, but clearly the point of this bill is that cryptocurrencies have become an additional viable means to participate in various forms of gaming.
A couple of bills stood out to my particular interests: H.R. 3708 – To amend the Internal Revenue Code of 1986 to exclude from gross income de minimis gains from certain sales or exchanges of virtual currency, and for other purposes, and Senate Bill S1241 – Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017
Both of these bills could have significant impacts on the cryptocurrency space for multiple reasons. To ensure I give each of them the appropriate amount of attention they deserve, I will focus on HR3708 in this column and follow up with a second column on S1241 within the next day or two.
I wrote about the foundations of today’s topic, HR3708, in a previous column – What is The Cryptocurrency Tax Fairness Act of 2017 and how could it affect my Bitcoin transactions? The bill was introduced in September and was promptly referred to the House Committee on Ways and Means. It sought to introduce an exemption of $600 in cryptocurrency transactions from income taxes and capital gains taxes. It was a favorable bill for those of us trading in cryptocurrencies which as of today, is still a very unfriendly tax environment – especially for those that spend their cryptocurrency like money and don’t utilize it so much as a store of wealth.
Unfortunately, this bill has apparently made no further progress. But, have faith, dear reader, for there is an alternative – House Concurrent Resolution 97, Directing the Clerk of the House of Representatives to make corrections in the enrollment of H.R. 1.
Before I delve too deeply into what HCR97 aims to achieve, I need to provide a little background.
After a series of convoluted machinations, amendments, and reconciliation with the Senate bill, HR1 ultimately transformed into the gigantic tax reform bill signed into law by President Trump on December 22nd, making significant changes to the Internal Revenue Code of 1986 for both individuals and corporations. Depending on whether you listen to Fox or CNN, it is either the biggest tax cut for the middle class in decades or the biggest corporate tax cut ever, carried on the backs of the middle class.
Whichever is closer to the truth, one thing is for sure: I have no earthly idea. I asked my sister, who is also a CPA with a thriving tax practice, and her thoughts were similar. They doubled the standard deduction, which is good, but they reduced exemptions, which has an opposing effect but then they increased the child tax credit which is good. With so many changes that conflict with one another, it will take some time to determine exactly who will benefit from this tax bill. For better or worse, in 2025 all of the individual tax changes expire.
What HCR97 aims to do is modify HR1 to include, among other things, many exact provisions sought with HR3708.
In a nutshell, the most relevant provision states:
“For transactions occurring after December 31, 2017, gross income (aka taxable income) shall not include gains from the sale or exchange of virtual currency for transactions under $600 for other than cash or cash equivalents.”
Note the use of the language “other than cash or cash equivalents.” To me, this indicates that a transaction on an exchange where you sell Bitcoin for USD would be a taxable event for any amount including those under $600. Personally, that is a little disappointing to me and not the way I understood it to be in my previous column. I had expected the language to include an exemption for an exchange of crypto for cash up to $600. No such luck.
What about an exchange of cryptocurrency for cryptocurrency? The bill includes this language:
(c) VIRTUAL CURRENCY.—For purposes of this section, the term ‘virtual currency’ means a digital representation of value that is used as a medium of exchange and is not otherwise currency under section 988.
Section 988 of the Internal Revenue Code refers to Foreign Currency transactions, so this seems to be an indication that they will not consider cryptocurrency to be cash or a cash equivalent (either foreign or domestic) for the purposes of this bill. I am hopeful this means the greenlight will be on to make sub $600 exchanges of crypto for crypto without there being any tax impact. Currently there is no clear guidance on this and some (not me or most other tax professionals) believe that exchanging crypto for crypto qualifies as a 1031 or like-kind exchange. There are many reasons why this doesn’t make sense including the IRS stance that many other forms of property including gold, silver and other properties are explicitly disqualified fromm like-kind exchange status.
The consensus is that, under current IRS treatment, if we make an exchange of Bitcoin for Litecoin today, we are deemed to have sold the Bitcoin for Fiat/USD, triggering a taxable gain or loss depending upon the basis, and then subsequently to have purchased the Litecoin with Fiat/USD – even though that is not the reality of what happened.
This bill would give us a little wiggle room to avoid taxes on the exchange of one crypto for another. For me, in 2017, I will have numerous small transactions to report where I traded Bitcoin for several altcoins. If this legislation had been in place, I would have to report nothing. Yeah, I’m a really small time trader. Don’t laugh at me.
HCR97 also contains an aggregation rule which disallows a “series of related transactions” from being exempted. It is hard to say how they will identify “related transactions” but I think it is safe to say that if you talk the dealership into letting you pay for that Lambo by making 350+ transfers of $599.99 each to their wallet hoping each individual transaction will be exempted, you will likely be in for a rude awakening come tax time.
Promisingly, the bill does provide for an increase in the exemption amount periodically by way of a cost of living adjustment from a base year of 2017. This could turn out to be especially critical if the true converts are right and the value of USD begins to implode.
Of course, while the tax overhaul that started as HR1 has passed and is now officially law, this concurrent resolution has only just been introduced and must yet be agreed upon by the House and Senate and signed by the President in order to be added to the law. It is not everything we had hoped for, but it is a step in the right direction in terms of establishing a more tax friendly environment for the crypto space.
Keep an eye out in the next day or two for my follow-up column on Senate Bill S1241. And if you have other interpretations of the proposed language of HCR97, or run into opposing viewpoints elsewhere about its implications, please comment and provide links where possible. Between the complexities of cryptocurrency and the sausage-making process of legislating, we need to keep as many eyes on this Congress as possible.
As usual, feel free to subscribe by providing your email for updates whenever I publish a new column and if you have found anything I have published of value, please consider a donation to the Crypto Tax Center by clicking here: Support The Crypto Tax Center
© Michael L. Collins
The Crypto Tax Center 
Much appreciated to see the level of detail in your report.
Personally I think this entire matter is like watching a slow moving David and Goliath scenario. The big governments are struggling trying to deal with the implications of the burgeoning benefits and threats of this new space while for individual citizens not of the .1% it is the greatest chance any have seen in their lifetime to try to not only change their fate but participate in something which will dramatically change many systems we currently have. Will change, not might change, absolutely will change. This is a global phenomenon and the energy that is being poured into these projects, the talent, the adoption and partnerships of some of the biggest companies in the world as we speak means this isn’t going anywhere and will only grow exponentially.
I believe that countries that make it a pain in the ass to trade, spend, save, participate in cryptocurrencies will, over time, suffer a loss of talent and innovation in this field in contrast to other nations which are far friendlier to the crypto space. I.E., if I were a young tech guy with an interest in this field I’d seriously consider moving my family to another country which would not tax the living crap out of us and gave us freedom to utilize whatever currency we wished. On a personal note I absolutely detest what the U.S. government is doing via tax law to cryptos and am totally unimpressed with the Bills being offered to offer some relief. Sorry but they’re pretty much a joke. Better than nothing only if they signal a movement to change the law dramatically for the better (see Italy, Switzerland, Belarus, Malta…. etc.). The U.S. has been an exceptionally poor steward of the U.S. dollar for decades now and I love how there’s endless talk about free market this and that, except when something comes along that is a potential threat to the status quo.
On the macro academic side, this whole thing is absolutely fascinating. This is where the revolution is happening across the globe. Picket signs and Guy Fawkes masks were a joke, so here is where things are being played out. It is like watching a class of civilizations play out in real time. There’s the entrenched old world, old money oligarchs who on the one hand don’t know what to make of this confangled digital crypto business and on the other hand are beginning to become quite afraid of what it might become and what it might mean for established systems. The currencies and the projects themselves will become disruptive to so many systems, all at once, all over the world, that unless the entire internet is shut down completely, there is just no way to stop it.
Nations that attempt to put the genie back in the bottle stand to quite literally become 2nd or 3rd world nations, if not already there, within the next 10-20 years. The world is global now and people make projects utilizing global talent. People now compete globally for work and this will only dramatically increase. With the almost hostile relationship with science of the current U.S. administration it seems that is carrying itself over to anything the old guard doesn’t understand, which includes cryptocurrencies and much of the disruption to systems being offered.
Israel is trying to control it by making participation in the crypto space illegal and at the same time centralize the hell out of it, eliminating cash through a government created “crypto coin.” This is the worst possible outcome as it is the ultimate loss of freedom for citizens. If cash is abandoned for a centralized digital only currency and the central governments and central banks can essentially steal money through negative interest rates or inflate as much new currency as desired then citizens will then turn to hard assets or the stock market, or even the black market to attempt to gain any advantage and avoid legalized fraud and theft of personal wealth. Or they’ll just get the heck out of there and move to Europe.
If nations and individuals were smart they’d invest some time, energy and resources into this space in order to participate in history unfolding. It’s not just for profit but because some of the projects being produced are unbelievably revolutionary and extraordinary in how beneficial they may be to so many people all over the world. Trying to steer people away will work on some for a while, but after enough of these projects prove themselves and more and more real world uses are employed, there won’t be any denying it. At that point the nations that had a hostile relationship with the space will find themselves struggling to catch up with other nations that have left them in the dust in terms of cutting edge advancements in any system we can imagine. It implies that an unfriendly relationship with the crypto space will eventually, quite literally will lower the standard of living for the unfortunate citizens of whatever country is that unwise.
Bottom line. I love my country in many ways but I really want to smack the shit out of these folks that just have no idea how naive and damaging their thinking and policies are.
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Man, I don’t have a clue what to do with my taxes this year and most of it has to do with contradictions of tax interpretation and advice that I get from sources that I’m researching on the topic.
For instance, in your article you say:
“…some (not me or most other tax professionals) believe that exchanging crypto for crypto qualifies as a 1031 or like-kind exchange. There are many reasons why this doesn’t make sense including the IRS stance that many other forms of property including gold, silver and other properties are explicitly disqualified from like-kind exchange status.”
and, also, “For me, in 2017, I will have numerous small transactions to report where I traded Bitcoin for several altcoins.”
Compare this with what I read in the following forbes online article (https://www.forbes.com/sites/robertwood/2017/12/28/loophole-allows-tax-free-bitcoin-exchanges-into-2018/#46d860a012fa):
First this, “But whether 1031 applied to cryptocurrency until year end is debatable. Some tax advisers say no, while others yes, provided that you did it all carefully.”
and then this, “sure, the law now says 1031 is only for real estate. But does that change in the law strengthen or weaken the argument that 1031 can apply to crypto deals done in say 2016 or 2017?”
and this, “However, the law says that, ‘[A]n exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017, or the property received by the taxpayer in the exchange is received on or before such date.’ What this means is that (if 1031 does apply to crypto swaps), it still does through the end of 2017”.
——————————-
What the hell am I supposed to make of all this, when the supposed “tax experts” are in disagreement about what does or doesn’t apply for taxes?
I’ve been in crypto since 2013 and have claimed all my gains on trades into $USD (I’ve only done this on bitcoin up to this point), leaving out a few bitcoin for altcoin trades when it came to claiming taxes as I was under the impression that they were exempt due to “property for property” (no exchange into fiat equivalent value). Now, after making close to 100 bitcoin for altcoin or vice versa trades, totaling in tens of thousands worth of $ gains, maybe even hundreds of thousands, and I’m completely unclear on whether they’re exempt from taxes for 2017.
Who can I go to to clear this up when no one seems to be certain on the laws? Am I just fucked?
I mean, I don’t want to pay tens of thousands of dollars in taxes if it’s perfectly legal for me to defer the gains through 2017 (until the 1031 rule was changed to not include crypto for crypto exchanges, if that is even the case).
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Sorry I am so slow to respond, James. I really appreciate your well thought response and I actually agree with you to a great extent. When I first began trading crypto, four whole months ago, I immediately thought I would treat everything as a like-kind exchange until I sold for fiat. Then I talked with some other people and did a little reading and convinced myself that it simply wouldn’t fly with the IRS. They have taken a long and consistent approach that when it comes to like-kind exchanges, it is real estate and pretty much nothing else. I had never done a like-kind exchange so had to read up on it and learned that they have provided definitive language that things like gold, silver and other items that behave similarly to crypto (but not exactly) are disallowed form like-kind exchange treatment. As CPA’s it is routinely hammered into our heads to follow the most reasonable and conservative conclusion. Most that I have spoken with have arrived a the same thing I have, unfortunately. The real problem is inaction by the IRS and our legislators who have been slow to respond to the massive growth in crypto. Now there exists an environment with a 700 billion dollar market capitalization and no real authoritative guidance for tax treatment of any sustenance. I think whatever you decide to do, document your logic, how you arrived there and the pertinent transactions and you will avoid getting in significant trouble even if it turns out to be something other than where the rules end up landing exactly. Just an effort to do something other than conceal your activity will go a long way during this time of the Feds struggling through the learning curve and trying to establish policy. Thanks again for your comments. I hope we both get rich! Michael
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