Cryptocurrency and Taxes: Musings

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    April 30, 2018 at 10:10
    According to the popular tax filing service Credit Karma, few cryptocurrency holders have reported earnings or losses on their 2017 tax documents. Out of the company’s 250,000 new filings, under 100 have disclosed capital gains from cryptocurrency investments, figures that are in line with the company’s former reports on cryptocurrency tax documentation.(Bitcoin Magazine)

    Will the IRS be able to reverse this? From 2013 to 2015 roughly about 800 people filed a bitcoin-related IRS Form 8949 (Fortune Magazine). Given that A) no one wants to think of themselves as a ‘sucker’ and B) bitcoin investors appear to be more libertarian than most individuals, the IRS might have a rough time securing compliance.

    Of course, it’s also true that investors are hesitant to pay anything forward when so much tax uncertainty remains. “Properly accounting for crypto-to-crypto trades, trading on multiple exchanges, and purchases made with cryptocurrency can be an overwhelming task,” Chris Kovalik, founder of Cointaxes, told Bitcoin Magazine. Yes, indeed. And investors might well wonder if they should draw attention to themselves by attempting to do so. And yet, the IRS says investors must comply.

    For the average crypto investor, this might evoke the same response one receives when told by a lawyer that they cannot sing Happy Birthday because its copyrighted (now invalid). The crypto crowd simply has no desire to accommodate.

    Regulation vs Taxes

    Consider how crypto investors came to view regulation early on. Bitcoin enthusiasts didn’t bow down to New York regulators when BitLicense came out in 2015. Fifteen digital currency companies left the state (can taxes be all that different?). More recently, Jesse Powell, CEO of Kraken, refused to answer questions from the NY Attorney General’s office about the Kraken exchange. And produced a lengthy public letter explaining why.

    While regulators appear to have a death wish for certain industries (witness how San Francisco is regulating scooters in this article), some legislators appear to understand the need for limits. They certainly don’t want to kill the goose that lays the golden egg. Unfortunately, it appears easier to overturn specific regulations that take on the IRS.

    For now, the IRS will likely go after those that have made substantial profits in cryptocurrencies. That’s somewhat fortunate, as the average investor will certainly resist trying to calculate their taxable obligation every time they change up their cryptocurrency. For better compliance, the IRS may want to reconsider how it has structured its compliance regs for crypto. They might want to acknowledge the many differences the crypto world has with the stock market (where I hear capital gains are all the rage).

    As an attorney stated to Bitcoin Magazine, “To ensure greater compliance, the IRS ought to make rules for cryptocurrencies that conform to the way crypto actually works and is used, so that taxpayers can accurately compute their tax liabilities arising from crypto transactions.”

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