The recent tax reform bill brought many welcome changes to taxpayers and should benefit most people through lowering their tax bills. But for cryptocurrency traders and investors there was one change that the tax bill made that could see them liable to pay taxes that they up to now have been avoiding.
The tax reform bill changed the types of in-kind transactions that are eligible to remain free from capital gains taxation. An in-kind transaction is one in which an individual swaps one asset for another similar asset. For cryptocurrency traders, that meant that they could swap their Bitcoin for Litecoin, or their Dogecoin for Bitcoin Cash, without having to pay capital gains taxes on any gains that accrued to the cryptocurrency they were exchanging.
Thanks to the ease of using, purchasing, and exchanging cryptocurrencies online and the development of new technologies to enable these swaps, these swaps are relatively easy to do. But the tax reform bill changed the exemption on in-kind transactions to limit them to “real property” rather than just “property.” That means that exchanging Bitcoin for Litecoin would now trigger capital gains taxes on the gains made from those bitcoins. That obviously will have a dampening effect on the swapping of cryptocurrencies.
Of course, many cryptocurrency users may just be tempted to ignore the tax implications of their exchanges and continue operating as they always have. But that is tempting fate, as the IRS is beginning a slow but steady crackdown on cryptocurrency users who have avoided paying taxes on their gains.
For investors in Bitcoin IRAs, the new rules shouldn’t have much of an impact. It obviously makes switching your cryptocurrency IRA investments from one cryptocurrency to another a little more difficult, but most IRA investors are holding those cryptocurrency investments for the long haul and so wouldn’t be switching out cryptocurrencies anyway.
Still, the attention that the government is paying to cryptocurrencies makes it all the more important to investors in Bitcoin IRAs and other cryptocurrency IRA investments to make sure that they maintain compliance with all federal laws and regulations. Trying to fly under the radar is not a good idea.