Even though bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, bitcoin IRA and other cryptocurrency are not considered a “currency.” On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS position on the taxation of virtual currencies, such as bitcoin. According to the IRS Notice, “Virtual currency is treated as property for U.S. federal tax purposes.” The Notice further stated “General tax principles that apply to property transactions apply to transactions using virtual currency.” In other words, the IRS is treating the income or gains from the sale of a virtual currency, such as bitcoins, as a capital asset, subject to either short-term (ordinary income tax rates) or long term capital gains tax rates, if the asset is held greater than twelve months (15% or 20% tax rates based on income).
It is important to remember that each time you sell or exchange a cryptocurrency for either cash, another cryptocurrency, or for goods or services, the transaction would be considered a taxable event, which would be subject to either, short-term or long-term capital gain/losses based on the basis (what you paid for the crypto), holding period, and the price the cryptocurrency was sold or exchanged for.
In general, Internal Revenue Code (“IRC”) Section 1031 provides an exception to the recognition of gain on a business or investment property transaction and allows one to postpone paying tax on the gain if the individual reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free. However, under the Trump tax plan, beginning in 2018, IRC Section 1031 exchanges are now only limited to real property. Therefore, for 2018 and beyond, the like-kind exchange exemption will not be applicable to cryptocurrency investors.
Therefore, in 2018, the sale or exchange of one cryptocurrency for another would be considered a taxable event and would trigger a capital gain or loss based on the difference between the purchase and sale price.
Adam Bergman is the founder of the IRA Financial Group & IRA Financial Trust Company. For more information on this topic please call 800-472-0646