Investors in bitcoin and other virtual currencies would lose a lucrative tax break under the Republican tax bill that’s on its way to President Donald Trump’s desk.
New limits in the bill would bar cryptocurrency owners from deferring capital gains taxes when trading one type of virtual currency for another — effectively closing a gray area in the tax code, experts say.
Those gains can be considerable. Bitcoin, which had an initial price of less than 1 cent when it first traded in 2010, was around $1,000 as 2017 began and surpassed $19,000 this week, at least briefly, before paring some of the gains. Many enthusiasts jump between bitcoin and a long list of similarly volatile competitors, such as ether.
For investors who hold the virtual currencies, “the bill is bad news,” said Kelsey Lemaster, a tax attorney with Goodwin Procter LLP. “Every time you trade one digital currency for another, one token for another, it’s going to be a taxable event.”
The change might not deter traders, who have been leaping into cryptocurrencies without researching what they are — let alone their tax implications, said Brian Kristiansen, a partner in the digital currency services practice at Friedman LLP.
Under current law, such trades have been protected under a provision that allows investors to defer capital gains taxes on so-called “like-kind exchanges” — trades that traditionally have been staples for investors in real estate, art, racehorses and aircraft. The deferral applies when owners of such property swap it for other property of a similar kind, typically within a 180-day period.
Increasingly, traders concerned about increased government oversight have sought to move between virtual currencies to take advantage of the like-kind deferral. Now, though, the GOP tax bill would restrict the break to trades of domestic real estate only.
“That’s only for real property now, and ‘crypto’ is about as not real as you can get,” said Friedman’s Kristiansen.
That change goes into effect on Jan. 1. After that, exchanges of cryptocurrencies “would be subject to tax at the time of the exchange,” 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 percent next year. The preferential long-term capital gains rate — which tops out at 23.8 percent — is owed when such assets are sold after a year.
With its new limits, Congress addressed a quirky section of the tax code. The rules for like-kind exchanges, first enshrined in the code in 1921, have never applied to stocks, bonds or other securities, and they contain some fine distinctions about what constitutes “similar” property. For example, a beef cow cannot be swapped for a dairy cow. Paintings can generally be swapped, but it’s not clear that a Rembrandt could be swapped for a Jackson Pollock, according to a 2012 article in an American Bar Association trade publication.