The tax implications of trading cryptocurrencies that were offered in the U.S. via Initial Coin Offerings just became a little clearer.
Five months ago, I released an article outlining the difference between capital gains/loss implications for Bitcoin and general, versus an ICO token that is treated as a security.
Based on yesterday's Senate hearing, it appears the U.S. Federal government views many, many of the ICO tokens as securities under U.S. securities law. There are some unique tax implications for capital gains that only apply to capital gain property that is also a security. Note: This following discussion assumes the IRS adopts the same "securities" classification as the SEC.
I refer to "ICO tokens" in the points below in detailed article, but I really mean a broader definition which includes any cryptocurrency or ERC 20 token, etc. that was distributed to the initial holders through a public sale or otherwise meets criteria of the SEC to be in their cross-hairs.
Key Points
Here are the basic highlights of the article, stay informed as this could have implications to 2017 tax season:
- Base Rule for Most Crypto Cryptocurrency in general is treated as property for income tax purposes (Notice 2014-21 cite). This definition generally includes any "convertible virtual currency" which is tradeable between users and which can be bought or sold for FIAT or other crypto.
- Securities Only #1 - FIFO Basis Tracking When multiple purchases of the same security are made in lots and then sold, generally, the "first-in-first-out" basis tracking method is applicable, unless an election to use a weighted average method (or permissible another rule/exception) is utilized. However, for non-security cryptos, specific identification of the crypto sold would technically be required.
- Securities Only #2 - Wash Sale - The selling and re-buying of securities within 30 days before/after the sale of the security is treated as a "washed sale" - meaning a resulting loss from the sale is ignored for tax purposes. Generally, however, this limitation is focused on losses versus gains. More information in the detailed article.
- Securities Only #3 - Pre-2018 Like Kind Exchanges - Like-kind exchange rules absolutely do not apply to securities. This is an issue on top of the pre-existing issue that different cryptos might not be "like kind" in the first place! I will say it again as I have, a like-kind exchange position on any crypto swaps is aggressive
- Securities Only #4 - Hard Forks This remains an uncertainty, if the SEC views ICO tokens as a proxy for true common stock. Distributions of additional stock/rights proportionally with respect to stock generally are not taxed under Section 305/307, rather the basis of the original stock is allocated among the old and new rights based on fair value. Question is whether this would apply to the forking of a token created through an ICO offering. In the context of ICO tokens, treating a hard forked currency as non-taxable is way too aggressive for me until further guidance is issued. Remember, an ICO token is still not legally common stock. But keep this on the radar.
- ICO Start-Up's Note - Generally, section 1032 protects a company from a taxable gain/loss on the issuance of their own "stock." Recommended to any start-ups to consult their tax advisors to determine if classification of their token is a "security" means there is any level of income tax protection in their ICO under section 1032. This still might be aggressive as an ICO token is still not legally common stock. Again, however, something to keep on the radar
- Day Traders Note - Traders who have mark-to-market elections should contact their tax adviser to discuss implications related to mark-to-market accounting for certain trades of ICO tokens (if applicable).
Full Article
https://steemit.com/money/@cryptotax/your-ico-tokens-may-be-securities-does-it-impact-your-u-s-taxes
Picture Credit
https://pixabay.com/en/users/geralt-9301/
*Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post/book does not create a client relationship between the author and the reader. *