Adam S. Tracy (aka Adam Tracy) Discusses Cryptocurrency Trading Taxation
Cryptocurrency tax attorney Adam S. Tracy explains the impact of the new GOP tax plan on cryptocurrency taxation and especially the availability of Section 1031 exchanges.
It was fun while it lasted but, the tax deferred party is over with the passing of the GOP tax bill. They made significant changes to 1031 exchanges. I’d previously opined on how you could utilize a 1031 exchange to shield capital gains on investment property, and bitcoin, and all the cryptocurrencies currently sort of being that undefined ground of not being securities, not being commodities, not being currency, and deemed by the IRS to be property.
It was a great way, especially with early adopters, to shield their capital gains. That party is effectively over, as of the first of the year. And so what the 1031 allowed you to do was effectively take investment property, and sell it, and use the proceeds to purchase another investment property, and avoid paying that capital gains. But, that window has been closed, and now it’s only limited to real estate transaction. So, you can purchase a real estate transaction, earning capital gains, sell that, purchase another real estate property in a 1031 exchange, and shield gains.
You can’t do that with cryptocurrency or any other type of investment property anymore. So the question becomes, what do I do? Is there any way to really shield capital gains? And the problem is a couple things. One, people have made so much that, you know, simple retirement accounts really won’t help shield significant gains. Two, most people have earned the money onshore, which wouldn’t allow them to take advantage of offshore jurisdictions where there’s lower capital gains or no capital gains, as the case may be.
So you’re really looking at a scenario, where you’re probably faced with paying at tax, if you want to cash out any amount of that cryptocurrency. One thing to consider is the concept of LIFO vs FIFO — first in first out, last in last out, which is methodology for calculating your gains from cryptocurrency. So, it’s worth the analysis to see, especially in rising market as it relates, to whether or not you are minimizing your capital gains burden or maximizing it, depending on which mythology you adopt.
Outside of that, you’re pretty much stuck. Short term capital gains obviously carry a higher rate than long-term capital gains, which are a year or more. So you may want to look at that as well. But as far as my prior guidance here that 1031 exchanges will shield you from potential tax liability, that went close pretty fast.
A former competitive rugby player, serial entrepreneur, trader and attorney, Adam S. Tracy offers over 15 years of progressive legal and compliance experience in the areas of corporate, commodities, cryptocurrency, litigation, payments and securities law. Adam’s transactional experience ranges from initial public offerings, mergers and acquisitions to initial coin offerings, representing the pure startup to NASDAQ-listed entities. As an early Bitcoin adapter, Adam Tracy has been deeply involved in the growth of cryptocurrency and offers a unique, proprietary approach to representing crypto-clients. Adam resides in Chicago, IL with his six dogs/cats, which he is fairly certain is illegal in the town in which he lives.
Bitcoin website: http://www.bitcoin-lawyer.org
Primary website: http://www.tracyfirm.com