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Cryptocurrency Presents Serious Tax Traps for Investors

Cryptocurrency Presents Serious Tax Traps for Investors

By    |   Monday, 15 January 2018 07:09 AM

Cryptocurrencies are gaining in popularity as an asset class and money.

Their existence is the result of a mixture of technology and the public’s desire for an alternative to traditional banking.

People do need banking services.  But for many, banking does not mean going to a bank or even using an ATM.  With the rise of online banking and shopping , nearly everyone is dealing in a virtual world.

There is a growing perception by the public that the bank operations are inconvenient and not user-friendly for most typical banking needs.

Many people feel that banks are inefficient and otherwise untrustworthy. 

The rise of presumably secured computerized financial systems gives the public a convenient option to traditional banks for basic financial services.

U.S. dollars ( Federal Reserve Notes) are effectively nothing more than fiat currency created by the computers of the U.S. Treasury and the Federal Reserve.

Nothing is backing up U.S. dollars since the 1970s beyond trust and faith. Virtual currencies are just an extension of this monetary paradigm.

The tax problem for those using cryptocurrencies arises because virtual currencies are investments and not money.   

Unlike using U.S. dollars, using cryptocurrency to buy goods and services, or even another virtual currency, potentially generates a taxable event.

Like other investments, buying or selling of a cryptocurrency generates the tax reporting complication of a capital gain or loss, either short-term or long-term, and other tax filing complications.  

The new Tax Cut and Jobs Act prohibits the use of the tax -free exchange provisions that may apply to other investment financial vehicles.

The exchange of one cryptocurrency for another cryptocurrency will cause a taxable event.

How about the situation where a cryptocurrency has gone up or down in market value and then used to buy goods or services?

Or where the cryptocurrency is cashed out of virtual form?

That creates a taxable event with the gain or loss on the investment in the cryptocurrency realized and recognized for federal income tax purposes.

 Unlike dividends and interest reported by the paying company or bank using Form 1099, for cryptocurrencies, there is currently no formal tax guidance for third-party reporting.

I think it is reasonable to expect that the Internal Revenue Service will quickly gear up and establish a tax-reporting compliance program. 

The government has big computer systems at its disposal, a lot of employees, and highly motivated by a hunger for your money.  

Tax returns prepared by a tax professional for the taxpayer creates significant preparer liability.  Tax preparers will be on the look-out for cryptocurrency transactions by their clients to make sure they get properly reported.

Unquestionably, cryptocurrency represents potentially serious tax traps for the unwary investor.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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Unquestionably, cryptocurrency represents potentially serious tax traps for the unwary investor.
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Monday, 15 January 2018 07:09 AM
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