By Lynnley Browning and Camila Russo
(Bloomberg) –Investors ter bitcoin and other virtual currencies would lose a lucrative tax pauze under the Republican tax bill that&rsquo,s on its way to Voorzitter Donald Trump&rsquo,s desk.
Fresh boundaries ter the bill would folder cryptocurrency owners from deferring capital gains taxes when trading one type of virtual currency for another — effectively closing a gray area te the tax code, experts say.
Those gains can be considerable. Bitcoin, which had an initial price of less than 1 cent when it very first traded ter 2010, wasgoed around $1,000 spil 2017 began and surpassed $Nineteen,000 this week, at least shortly, before paring some of the gains. Many enthusiasts hop inbetween bitcoin and a long list of similarly volatile competitors, such spil ether.
For investors who hold the virtual currencies, &ldquo,the bill is bad news,&rdquo, said Kelsey Lemaster, a tax attorney with Goodwin Procter LLP. &ldquo,Every time you trade one digital currency for another, one token for another, it&rsquo,s going to be a taxable event.&rdquo,
The switch might not deter traders, who have bot leaping into cryptocurrencies without researching what they are — let alone their tax implications, said Brian Kristiansen, a playmate ter the digital currency services practice at Friedman LLP.
Under current law, such trades have bot protected under a provision that permits investors to defer capital gains taxes on so-called &ldquo,like-kind exchanges&rdquo, — trades that traditionally have bot staples for investors ter real estate, kunst, racehorses and aircraft. The deferral applies when owners of such property interchange it for other property of a similar zuigeling, typically within a 180-day period.
Increasingly, traders worried about enlargened government oversight have sought to stir inbetween virtual currencies to take advantage of the like-kind deferral. Now, however, the GOP tax bill would restrict the pauze to trades of domestic real estate only.
&ldquo,That&rsquo,s only for real property now, and &lsquo,crypto&rsquo, is about spil not real spil you can get,&rdquo, said Friedman&rsquo,s Kristiansen.
That switch goes into effect on Jan. 1. After that, exchanges of cryptocurrencies &ldquo,would be subject to tax at the time of the exchange,&rdquo, said Lisa Zarlenga, a tax attorney with Steptoe & Johnson LLP.
Investors typically have to pay taxes on their short-term capital gains at their individual income rates, which will top out at 37 procent next year. The preferential long-term capital gains rate — which tops out at 23.8 procent — is owed when such assets are sold after a year.
With its fresh thresholds, Congress addressed a quirky section of the tax code. The rules for like-kind exchanges, very first enshrined te the code ter 1921, have never applied to stocks, bonds or other securities, and they contain some fine distinctions about what constitutes &ldquo,similar&rdquo, property. For example, a beef cow cannot be interchanged for a dairy cow. Paintings can generally be interchanged, but it&rsquo,s not clear that a Rembrandt could be exchanged for a Jackson Pollock, according to a 2012 article ter an American Drankbuffet Association trade publication.
The sheer multitude of virtual currencies — all running on different blockchains, the encrypted networks that record transactions — has always made them somewhat awkward candidates for the like-kind exchange deferral, Lemaster said. A so-called utility token, like Filecoin, is very different from &ldquo,true cryptocurrencies like bitcoin and ether,” he said.
Ter March 2014, the I.R.S. proclaimed virtual currency to be property, like gold or real estate, and not currency, for tax purposes. That distinction makes it subject to capital gains taxes. Despite the definition, the tax-collecting agency hadn&rsquo,t fully defined how — or whether — cryptocurrencies could be used ter like-kind exchanges.
“There&rsquo,s always bot a question under current law spil to what types of currencies can be exchanged and qualify,” Lemaster said. “The conservative view is that it doesn&rsquo,t qualify.”
Most cryptocurrency investors have disregarded that legal fuzziness, and taken the treatment that trading a stash of, say, bitcoins for litecoins, qualifies spil exchanging one form of property for a similar one. &ldquo,People have most likely foot-faulted all overheen the place,&rdquo, Lemaster said.
Once a exchanged asset is actually sold, the seller would owe capital gains taxes, at a tax rate that depends on whether it wasgoed held for more than a year. While that may take a bite out of some investors&rsquo, gains, it&rsquo,s good for cryptocurrencies te the long run, said Ryan Losi, who leads the international tax practice at accounting rock hard PIASCIK.
More defined regulation will mean that digital assets are more lightly accepted ter the mainstream, Losi said.
&ldquo,Spil this fledgling type of payment gets older and more adopted, more scaled, eventually it will get regulated,&rdquo, Losi said te a telephone vraaggesprek. &ldquo,More and more people will come to accept it and agree with it, even if early on it is very speculative.&rdquo,
Likewise, the fresh law is unlikely to rook rente ter listing exchange-traded funds related to virtual currency, said William Rhind, the chief executive officer of GraniteShares, an investment company that filed forms last week seeking permission to list two bitcoin ETFs. More than 15 bitcoin-related ETFs have bot proposed since 2013.
Rhind said existing rules already prohibit securities from being used ter like-kind exchanges. &ldquo,I don&rsquo,t think it&rsquo,s relevant,&rdquo, he said.
To voeling the reporters on this story: Lynnley Browning te Fresh York at [email protected] ,Camila Russo ter Fresh York at [email protected] To voeling the editors responsible for this story: John Voskuhl at [email protected] David Scheer