Tax-Free Cryptocurrency Trading in the US to End Under Tax Cut Bill

Cryptocurrency traders would lose a profitable tax break under a tax cut bill which President Donald Trump is expected to sign.

The Tax Cuts and Jobs Act is on its way to President Trump’s desk after it passed through the House of Representatives and Senate. Once enacted as a law, this will define the act of trading cryptocurrencies as a taxable event.

The said bill will also prevent parties who are into trading virtual assets from deferring the capital gains taxes that they will owe on cryptocurrencies if their value grows while they hold the assets.

In the present legal standard, cryptocurrency trading is recognized as like-kind trading, which allows the payment of capital gains tax to be delayed as the assets being exchanged are of similar nature as long as the trade is finished within the required 180 days. According to Lisa Zarlenga, a tax lawyer from Steptoe and Johnson, when this exception stops to be applied in digital currencies, their exchange will be subject to tax during the time of the trade.

As of press time, the specific nature of this likeness is yet to be clarified, but nevertheless, the tax cut bill will restrict the exception from capital gains tax so this will exclusively be applicable to local real estate deals.  

In 2014, the US Internal Revenue Service (IRS) issued guidelines stating that taxpayers can basically realize a capital gain (or loss) on the exchange or sale of digital currency considered as a capital asset. This designation generally applies to cryptocurrencies that behave in a manner that is similar to investment properties including bonds and stocks. To put it simply, most cryptocurrencies today are technically taxable as capital gains.

However, the IRS has not defined if the virtual asset deals are considered under like-kind deals. The differences in the forms of value offered by different digital tokens (such as speculative tokens versus utility tokens) make the like-kind status not clear in terms of its application to digital currencies.

Under the prevailing law, parties who are selling virtual currencies that they have acquired through an exchange for other virtual assets are obliged to pay capital gains tax at around 37%. This tax rate will lower to 23.8% if the party hold the tokens for at least one year.

Once the tax cut bill becomes a law, the like-kind deals exemption will cause the exemption on cryptocurrencies to stop starting 1st January 2018.