This article outlines changes to the tax code that will impact different crypto activities. For those of you who are operating a crypto business without forming a company, I’d suggest reading Section 3 to see the tax benefits of operating under a licensed business.
President Trump’s recent tax bill affects cryptocurrency investors, traders, issuers, etc. in ways not explicitly mentioned in its title. The bill includes changes to the federal tax code which will have an indirect impact on cryptocurrencies such as bitcoin, tokens, etc.
- Like-Kind Exchanges
Retail traders are familiar with the burdensome reporting requirements that accompany stock or commodities trading. For example, each time a trade is made, the gain or loss must be reported. Trading platforms offer downloadable reports to be provided at tax time.
Attorneys and accountants agree that trading digital assets triggers the same tax reporting requirement. However, some crypto traders have treated cryptocurrency trades as “like-kind” exchanges for ease of reporting. In short, section 1031 of the tax code allows capital gains to be deferred for certain “like-kind” exchanges of property. An example of a like-kind exchange includes a trade of commercial real estate for another piece of commercial real estate.
Some cryptocurrency investors regard crypto gain exchange for crypto as a like-kind exchange exempt from capital gains taxes. However, the exemption only applies to “real property” of like-kind under the new law, meaning that cryptocurrencies will not qualify. Prior to 2018, it was difficult to report your crypto gains and losses because few service providers offered efficient ways to collect this information. Traders likely relied on perceived ambiguity in the tax law and reported gain and loss according to cash for crypto transactions rather than all crypto exchanges to alleviate the burden of reporting every trade. The new law eliminates any ambiguity.
- Loss Carrybacks
The change regarding loss carrybacks is a blow to all startups. Previously, a company could carry losses back two years. Under the new tax bill, this tax break is eliminated. So some companies who issued initial coin offerings (ICOs) and treated the sale of tokens as income have taxable income but cannot carry back any operating losses incurred in the two years – a tax break many were hoping to receive.
- Corporate Tax Cuts and Deductions for LLCs
The new tax bill also includes a deep cut on the corporate tax rate from 35% to 21%. This may disincentivize large companies from engaging in sophisticated tax strategies to avoid paying U.S. taxes. It is also beneficial to startups, which can deploy income more efficiently for growth.
Most relevant to small business owners and individuals conducting crypto activities without an official business is the 20% deduction for pass-through business income. Qualified pass-through entities include (1) Sole proprietorships; (2) Partnerships; (3) S corporations; (4) Limited liability companies (LLCs).
Although sole proprietorships and partnerships receive the deduction, many choose to operate as an LLC. This is because LLCs can be operated informally but provide one big advantage: limited liability or protection of one’s personal assets from creditors and lawsuits.
Additionally, mining requires large amounts of capital outlay for ASICs, video cards and other hardware. Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. Under the new law, a business can choose to deduct the cost of certain equipment by deducting up to $10,000 per year for 5 years (old law) or deducting the entire cost of the equipment in one year. This flexibility is a boon to crypto miners because the profitability of mining can vary significantly from year to year.
Incorporation is not for everyone, but individuals operating crypto businesses could be missing out on an opportunity to shield themselves from liability while taking advantage of various tax deductions.
Bull Blockchain Law, LLC is a blockchain and cryptocurrency-focused law firm. The firm offers legal services tailored to the unique needs of each client working with blockchain technology.
Schedule a free 30-minute consultation today to have one of our attorneys evaluate the tax strategies of your business.