Disclaimer: This article does not constitute a legal opinion, tax advice, or official reference material for tax purposes.
2017 was the year that digital currencies became popular and profitable. It was an exciting time as each day brought new and extravagant price hikes that brought the crypto market cap from less than $20 billion to more than $800 billion by the end of the year.
The whole thing felt a bit like a raucous house party. Things got wild and a little weird, but who cares? It was a great time.
If 2017 was the party, 2018 is the cleanup.
Crypto markets continue to be popular investments, and blockchain technology is as prolific as ever, but there is definitely a different vibe this year. For example, less than three months into 2018, ICOs already raised nearly the same amount of money as they did throughout all of 2017. However, many headlines cover important issues like regulation, security, and now – taxes.
Cryptocurrencies Are Not Tax-Free
After a prodigious growth year, the Internal Revenue Service (IRS) is coming after the tax revenue that rightly derived from the significant profits gleaned from crypto market acceleration.
In most instances, cryptocurrencies operate in an interminable gray area where it’s difficult to know how to rightly apply the law.
For example, there is significant debate about whether ICOs should be classified as securities and be subject to corresponding regulation.
However, for tax purposes, the IRS considers digital currencies to be owned property rather than legal currency, and, as a result, it’s subject to taxation. According to a 2014 IRS statement that was reiterated in August,
“[digital currency] does not have legal tender status in any jurisdiction…the notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency.”
In its broad guidelines on taxable income, the IRS clearly states, “The sale or exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.”
Unfortunately, for many investors, they have not operated as if their crypto investments are taxable, and now the IRS is making a move to collect those taxes.
On Friday, the IRS gained access to user information for a select group of Coinbase users.
“The court ordered Coinbase to provide taxpayer ID, name, birth date, address, and historical transaction records for certain higher-transacting customers during the 2013-2015 period.”
The Wall Street Journal notes that “Driving the IRS’s decision was its belief that few bitcoin investors appear to be paying taxes due on sales.” In comments to the Journal, Bryan Skarlatos – a tax lawyer who specializes in cryptocurrencies, remarked that “Digital currency holders shouldn’t think they can hide from the IRS.”
A Welcome Series of Events
Certainly, conversations about regulation or taxes are not as sexy as counting profits by the hundreds of percent. Even so, on the way to continued growth and sustainable success, these topics need to be addressed both by the market and by regulators.
Last week, Congress released an overwhelmingly positive report on cryptocurrencies and businesses and investors continue to be bullish on the importance of blockchain technology.
Everyone would rather not pay taxes, but this move isn’t punitive – it’s fair. What’s more, it reveals that crypto is more ingrained in the mainstream conversation than ever before.
In other words, just because the party’s over, doesn’t mean the celebrations stops.