The Tax Cuts and Jobs Act, which is heading to the desk of President Donald Trump after being approved by the Senate and House of Representatives, defines the act of exchanging one cryptocurrency for another as a "taxable event," says tax attorney Kelsey Lemaster of Goodwin Procter LLP.
He and other lawyers have related that, if the bill is signed into law, it will prevent parties that trade digital assets from deferring the capital gains taxes (CGTs) that they would owe on those virtual currencies if their value increased while in the traders' possession.
Under the legal standard currently in effect, these types of trades have been treated as "like-kind exchanges." This allows the payment of CGTs to be deferred because the properties being swapped are of a similar nature, so long as the exchange is completed within the space of 180 days. If and when this exception ceases to apply to virtual currencies, their trade "would be subject to tax at the time of the exchange," says Steptoe & Johnson LLP tax attorney Lisa Zarlenga.
At the moment, the precise nature of this likeness is not clearly delineated, but in any case, the bill would limit this exemption from CGT so that it would apply exclusively to domestic real estate trading.
Guidelines issued by the Internal Revenue Service in 2014 state that a "taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset," a designation which generally applies to those cryptocurrencies that act in a manner similar to "stocks, bonds, and other investment property." In other words, many cryptocurrencies are, today, technically subject to capital gains tax.
However, the agency has never definitively stated whether digital asset swaps fall under the rubric of like-kind exchanges. According to Lemaster, differences in the types of value offered by various tokens (e.g., utility versus speculative) make the "like-kind" designation dubious insofar as it applies to cryptocurrencies. "People have probably foot-faulted all over the place," he posited.
Under current law, parties selling cryptocurrency that they acquired in exchange for other digital assets would owe CGTs at a rate of up to 37 percent. The maximum rate would drop to 23.8 percent for tokens they had been holding for at least a year.
If Trump signs the bill, the "like-kind exchanges" exemption would explicitly stop applying to cryptocurrencies beginning on January 1, 2018.
ETHNews recently reported that on December 18, Representative Jared Polis (D-CO) introduced a concurrent resolution that aims to "make corrections in the enrollment of" the Act by defining gains won through the selling or trading cryptocurrency as "gross income" if they exceed $600.