New US Tax Law Closes Loophole for Cryptocurrencies

Unlike physical assets, investors can no longer exchange cryptocurrencies to avoid taxes.

Last week, US President Donald Trump signed one of the most controversial tax reform bills in the US. The new laws will impact the lives of almost every US citizen in some way or another, and cryptocurrency investors are no exception to that. For the US’s crypto investors, the new laws brought bad news this Christmas as the authorities tighten the tax loophole that they had been using to save money.

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Since March 2014, to tax Bitcoin and all other digital currencies, IRS has considered them properties – investors had to pay capital gains tax on them. But that also allowed tax to be paid only while exchanging cryptocurrencies with fiat currencies.

For citizens holding coins for less than a year, they had to pay regular income tax ranging from 10 to 37 percent, based on income level. But for the holdings above a year, only long-term capital gains tax had to be paid, which caps at 24 percent.

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To avoid short-term capital gains tax, cryptocurrency investors in the US are using something called ‘1031 exchanges’ to swap between coins.

The exchanges under section 1031 of the tax laws are particularly used by property traders to save tax on the exchange of properties between two parties. Though nothing was mentioned in the law regarding whether cryptocurrencies qualify for such exchanges or not, investors were exploiting this rule, which existed in a grey area.

With the new tax laws, cryptocurrencies are exclusively excluded from using the 1031 exchange for any type of coin swapping. From now on, crypto investors will be taxed for every trade they made.

In 2015, only 802 customers of Coinbase declared Bitcoin investments, which prompted a controversial lawsuit against the trading platform. The IRS was also concerned with the recent skyrocketing price of Bitcoin and other altcoins. If not taxed properly, the state’s revenue collectors stand to miss out on a huge windfall.

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