As the total cryptocurrency market cap crossed $100 Billion, there is a sudden exponential exposure in the main media about the same.The 2000-10000% increase in profits over the past few months have surely attracted investors and governments around the world to equally look at it. As we are heavily doing day trading and pocketing profits, we all forget one aspect that will come in Q1 2018 and that is the taxes.
In this article we will try to examine the tax situation with respect to trading in USA with respect to
- Property Taxes
- Short Term Capital Gains
- Long Term Capital Gains
In 2014, the USA government declared Bitcoin and all sorts of cryptocurrencies as a property. So anyone holding a cryptocurrency is supposed to pay property taxes on their holding. The natural question would be what is the fair evaluation for a coin in a given current year?.This could be a tricky one. As per the IRS directions, "taxpayers will be required to determine the fair market value of currency in US dollars as of date of payment or receipt". This is a quite important statement!.
Let's think with an example. If i brought ethereum 100 ETH at a price of $50 and currently its at $300. I will pay property tax at a total valuation of 100 x $50 = $5000 rather than 100 x $300 =$30000. So assuming an average property tax rate of 2.0%(this is a rough estimate, we will need to pay a tax of only $100 to the state government. Also there is no federal tax as property taxes are generally collected by the state governments. So we just pay $100 on my 100 ETH if we are Holding.
As a second case, say if we did do day trading. So i brought 100 ETH for $50 each and sold at $100 and when there was dip back to $50, you brought again. Dissecting the above lines:
- Buying 100 ETH for $50
- Sold at $100 = capital gains = (100 x $100)-(100 x $50) = $5000.
- Buying back 100 ETH on dip for $50 each.
In this situation, we are supposed to pay short term capital gains tax on $5000 made in trade #2. This is profit realised and is treated as ordinary income for tax purposes. Based on our current tax slab, we will pay anywhere from 15 to 40%. Let's take 30% is the average. So $1500 should be paid as short term capital gains to the federal government and then $100 should be paid as property tax to the state government. Net tax = $1600.
In a third case, say we brought 100 ETH for $50 this year and did sell after holding it for an year for $100 each. In this case the next taxable money = $5000. On this amount, long term capital gain tax will be applied. The long term capital gains taxes are considerably less than short term one. It ranges from 0 to 20% based on total income earned in a year. If we are earning a total income of $65000 (including all wages, profits etc), then long term tax is only 15%. So net tax on the ETH trade would be $750.
Most of us do a mix of both short term and long term trades. Also most exchanges are not robust enough to give a good tax advice on trades. So keeping an exact timestamp sheet of each transaction is very important. An excel sheet with transaction id, profit/loss made and date would be fine.
Please note that in 2016, only <900 people declared having a coinbase account on their tax papers. This year with a $100 billion cap, IRS is surely going to come behind people for taxes. If you are wondering how IRS will find out about your account, just know that they have rights to access you bank accounts directly at this point. Sooner or later, coinbase and other exchanges will be required to submit account holder details to them. Tax evasion is a crime. So make sure you trade smart and include a tax professional during filing taxes.
How are the tax situations in Europe? Is there a way to avoid these taxes in USA?