Newbie capital gains question (USA)

[squatter]

I have a simple tax question. My friend just bought into Bitcoin and Ethereum for the first time this month. He plans to sell everything for short term profits early next year (January or February, depending on the price action).

He asked me how to report taxes on the gains. Hopefully I'm correct (otherwise I've been doing my taxes wrong), but I thought I should confirm before giving him an answer:

1) He has no capital gains taxes due (on these investments) for the year 2017, since he won't realize any profits until early 2018. Taxes on these gains would be due in April 2019 for the tax year 2018.
2) Short-term capital gains are taxed at the same rate as ordinary income.

Thanks for any guidance you can provide!

[jaocoincrypto18]

I have a simple tax question. My friend just bought into Bitcoin and Ethereum for the first time this month. He plans to sell everything for short term profits early next year (January or February, depending on the price action).

He asked me how to report taxes on the gains. Hopefully I'm correct (otherwise I've been doing my taxes wrong), but I thought I should confirm before giving him an answer:

1) He has no capital gains taxes due (on these investments) for the year 2017, since he won't realize any profits until early 2018. Taxes on these gains would be due in April 2019 for the tax year 2018.
2) Short-term capital gains are taxed at the same rate as ordinary income.

Thanks for any guidance you can provide!

For the accurate gains tax in your country you should go to directly to your bureau of internal revenue for exact computations details to avoid confusion. Here in our country we just pay bitcoin tax only thru our local exchanges in which everytime we convert bitcoin for our local paper money our tax are already included in the service charge.

[iamTom123]

I am not so familiar with the tax codes of USA but if the taxable year starts from January to December then you can right the gains should be reflected when he would be paying his tax in 2019 since the transaction took place in 2018. Of course, not unless the tax system is requiring anyone to pay as soon as possible after the transaction took place. Let's follow this thread and hope there would be someone who is familiar with IRS so we can get enlighten. Here in my location, your post is very much applicable though many of us here don't declare capital gains on cryptocurrency as the government is not yet strict in implementing tax laws. However, am not promoting tax evasion so it is really an individual decision to make. We should realize that one of the reasons why the government has become wary with cryptocurrency is the question of taxation as many of those in authority find it hard to track crypto transactions and many are not really declaring gains or income.

[Chris!]

Tell your friend not to be such a noob and to HODL because his worthless fiat is dropping 3% every single year. I don't understand when people think selling is "taking profits". All it really is is a missed opportunity.

[Laland]

Well as long as he doesnt spend on something then i guess it not very questionable. Because i know someone who used a professional's name for his sake. But it is becoming hard to rename it again to his own original name.

[Gotham14]

I don't remember but there is an explanation on what the state of bitcoin in the US is recognized as a commodity, and here goes the tax base. Correct me if I'm wrong.

[squatter]

Tell your friend not to be such a noob and to HODL because his worthless fiat is dropping 3% every single year. I don't understand when people think selling is "taking profits". All it really is is a missed opportunity.

I hear that, but there’s something to be said for trading the volatility along the way. I’ve explained my long term bullish position to my friends. But I’m also a trader, not just a long term investor. If BTC hits $20k-25k in a blow off top, I’ll be selling into it to buy back cheaper. Parabolic advances don’t last forever.

I am not so familiar with the tax codes of USA but if the taxable year starts from January to December then you can right the gains should be reflected when he would be paying his tax in 2019 since the transaction took place in 2018. Of course, not unless the tax system is requiring anyone to pay as soon as possible after the transaction took place. Let's follow this thread and hope there would be someone who is familiar with IRS so we can get enlighten. Here in my location, your post is very much applicable though many of us here don't declare capital gains on cryptocurrency as the government is not yet strict in implementing tax laws. However, am not promoting tax evasion so it is really an individual decision to make. We should realize that one of the reasons why the government has become wary with cryptocurrency is the question of taxation as many of those in authority find it hard to track crypto transactions and many are not really declaring gains or income.

Thanks. Still hoping someone can weigh in on this. The IRS is clearly watching Bitcoin closely. They submitted a revised request for a court order for Coinbase customer information. The court just approved it and ordered Coinbase to comply. Anyone who transacted more than $20,000 in one year during 2013-2015 on Coinbase is now having their info handed to the IRS.

With BTC at $10k, all investors now need to pay attention. Long term holding isn’t the concern here so much as interfacing with exchanges who have the IRS nosing around.

[baradfo]

When it comes to taxes in the US for Bitcoin, or any cryptocurrency, the IRS has deemed that crypto's are a commodity just like gold. So the same rules would apply. Also, as an investor I do believe that there is a stipulation saying that if you put your gains into another investment vehicle that the tax is either deferred or nulled do to that. I'm still looking into that little tidbit. But as to your original question yes when you buy BTC this calendar year you won't have to pay taxes on it until it's sold. Just have your friend keep records of the transactions (i.e. the blockchain transaction number) for both buying and selling for tax purposes.

[Cubanlinx81]

I have been doing a lot of trading these day at sizable gains. I have yet to withdraw any of my earnings into cash as I have not yet worked out what  the tax issue are of yet. Would it be best to keep the fund in bitcoin or use keep the fiat on the exchange until withdrawn to my account?

[officerpants]

If you're in the US and you're involved at all with cryptocurrency, I'd highly recommend finding a financial and/or tax adviser who is familiar with what cryptocurrency is, and the tax codes around it (and mind the fact they'll probably tell you it's a risky investment (apparently people don't know this, if you look at the main board, here   )

That being said, the tax codes in the US around cryptocurrency are ambiguous at best.  They could be interpreted that crytpocurrency is a commodity, as well as a security, and an income.

If it's considered a security, you're liable for taxes on *each trade* you do, as a capital gain.  If you gain money, you owe capital gains taxes on that.  If you lose money, you may be able to deduct the taxes on that loss.  That is, IF both the gain and loss happen in the same year.  You can't claim losses from 2017 against gains in 2018.  This includes crytpo-crypto trading (BTC or ETH to altcoins, for example, each TIME you transfer or trade, it's a taxable event).

However, it's also considered a commodity, so you'll be liable for profit gained on cryptocurrency when you cash out from crytpocurrency into fiat money.  That's considered income from a commodity, and you may have to pay taxes on that.  If you use it to purchase products (like ordering a pizza) that money could be considered income from the sale of a commodity.  Taxes apply.

Lastly, it's a security, so there maybe capital gains taxes that are liable when you hold the cryptocurrency for more than a year.  The tax rules differ between securities you hold for less than one year, versus more than one year.

In additional to all these rules, the IRS has rules about how often you can buy and sell a security.  If you bought BTC today, for example, and the price jumped to $15k next week.  Then you sold, had a fat stack of cash.  The *next* week, BTC crashes and is only worth $8k, but you know it's going 'back to the moon' because it always does?  You may be penalized significantly for purchasing it again immediately.  (they call these wash-sale rules).

Basically, get a tax adviser and financial planner who know what BTC is.  It's NOT a tax haven, it's not "tax free money" and you will NOT get away with saying "the government doesn't control it, so they can't tax it" or "it's anonymous"  Assume the IRS knows every trade you make.

(full disclosure, I'm not a tax adviser or financial planner, and this isn't tax advice, I've just read a LOT about this, because I value not going to jail well more than making fat stacks on BTC, Al Capone went to jail for tax fraud.  Al mf'ing Capone)