Summary: office assistant making $45k a year makes almost $120k in short term capital gains by selling his cryptocurrencies which had appreciated. Now he owes $50k in taxes. He uses the $120k to buy other cryptocurrencies, which decline 75%. Now he has $30k in assets and owes $50k in taxes. He cannot offset the original gain in 2017 with losses realized in 2018.
I wonder how many other people are in this situation.
There’s a reason we have accredited investor and qualified purchaser regulations. Perhaps they should have been applied to crypto and these situations would have been avoided. Although that would also totally defeat the purpose of cryptocurrency. *shrug*
2017 treatment of taxes is different from 2018. I presume he didnt sell btc/usd but instead btc/altcoins. In this circumstance, which is highly likely given the necessity to purchase altcoins with btc (or a few others), it will work out in his favour. He should owe no capital games and instead, now be able to recognize st losses if he is wise and transfers that money back to a safe haven such as eth.
lol fuck that shit. this is a 1031 exchange in my book. tell irs to fuck off.
I take it you’ve never done a 1031 exchange. You can’t be in possession of the money at any time in between the sell and the buy in order to effectuate a 1031. The facts here suggest the person sold an asset, took possession of the cash ( thus triggering a capital gain ), and then purchased a different asset.
Thoughts and prayers, ripple guy
imho for the op of the reddit can still do 1031 exhcange since he bought sold in 2017. when you buy and sell bitcoin you never touch the cash. unless you withrdraw from exchange.
Bad News: Republicans Just Closed This Lucrative Cryptocurrency Tax Loophole Virtual-currency investors won’t be able to avoid paying capital-gains tax with this trick any longer. Republicans just closed this lucrative cryptocurrency tax loophole One of the more subtle changes made in the new tax law entails how “like-kind exchanges” are dealt with (Section 1031 of the U.S. tax code, in case you’re interested). Like-kind exchanges describe the act of an “investor” who disposes of real and/or personal property and uses the proceeds of that sale to purchase a similar asset. For example, if a parcel of land is sold and used to purchase another parcel of land, or a piece of art is sold with the proceeds being used to buy another piece of art, within a defined period of time, these probably qualify as like-kind exchanges. According to the U.S. tax code through Dec. 31, 2017, assets that qualify under the like-kind exchange rules can avoid capital-gains tax. One such “investment” that qualified was cryptocurrencies. An investor could sell bitcoin and purchase Ethereum, Ripple, or any other of the hundreds of investable cryptocurrencies, and claim it was a like-kind exchange, thus avoiding capital-gains taxation. Considering that the combined market cap of virtual currencies jumped more than 3,300% last year, the like-kind exchange loophole may have saved cryptocurrency investors a fortune… for now. However, a rewrite of this section of the U.S. tax code did away with all iterations of the like-kind exchange, save for instances that relate to real estate. That means that any time cryptocurrency investors sell one virtual coin to buy another, beginning on Jan 1, they’ll have to report the sale of the original coin as a capital gain or loss on their federal tax returns. Wait – it gets even more complicated for crypto investors And not only are cryptocurrency investors on the line for the capital gains they net from their investment activities, but virtually any transaction involving cryptocurrencies could also necessitate paying capital-gains tax. For instance, if an individual uses bitcoin to buy a good or service, the IRS views that as a disposition of assets, requiring the “investor” to pay appropriate capital-gains tax. Making matters even more complicated is that popular cryptocurrency exchanges aren’t guaranteed to provide investors with a 1099 that outlines their cost basis and sale price. It truly leaves a number of virtual currency investors flying blind, so to speak. Not surprisingly, a recent survey from LendEDU found that 36% of bitcoin investors weren’t planning to divulge their capital gains to the IRS in the upcoming tax season. Of course, this upcoming tax season will be the last opportunity cryptocurrency investors will have to use like-kind exchanges to their advantage. From here, they’ll have no choice but to report their gains and losses, or run the risk of financial penalties or criminal charges. And make no mistake about it: The IRS is coming for cryptocurrency tax evaders. The regulatory tax body recently won a court case against Coinbase, one of the most popular crypto exchanges in the world, requiring it hand over information on 14,355 users who’d exchanged more than $20,000 worth of bitcoin between 2013 and 2015. Since only 802 taxpayers reported bitcoin-based capital gains on their 2015 federal returns, the IRS is aware that it has a capital-gains evasion problem on its hands, and it’s done sitting idly by. Long story short: The free ride is over for digital-currency investors.
Except that you can only 1031 real estate now. And even before, I don’t think you could 1031 Bitcoin.
edit - Nerdy beat me to it.
No chance they sold to cash. It’s a b to transfer btc back to a bank account and results in a painstakingly long wait. More importantly tho, if your intention was to invest in altcoins it would make absolutely no sense to sell btc - usd then usd - btc - altcoins. Aside from inherent fees, it would delay the process tremendously with settlement times.
It’s highly likely this sequence never touched cash and would be considered a 1031 given the ruling in 2017.
The consensus on the Reddit thread seems to be that the guy is just screwed. He cannot defer the capital gains tax, but can only claim 3k a year in losses.
It usually takes 3 days for me to convert Bitcoin to cash (Coinbase to bank account). My Visa Shift card lets me spend Bitcoin as USD immediately, but it has daily limits.
Play stupid games, win stupid prizes. I don’t pity this guy. The whole thing is a zero sum game, someone’s got to come out on the losing end.
I mean isn’t that the golden rule of investing? Always keep enough aside to cover your taxes?
I think Phil Falcone f’ed up on this as well in the past…
Yeah, but that’s why /r/personalfinance was such a funny place a few months ago. People that had never invested before bought btc or something similar, made bank, sold, and never thought about tax season. There were dozens and dozens of threads like this one. They were all “I made $300k in btc and spent it on a house but now I owe $60k in taxes. The IRS is wrong, right guys?”
Haha…noobs.
Fools… imagine them not having done their bitcoin trading through a swiss bank account, then having their new houses and lambos purchased via dummy corporations set up in other separate countries, in order to avoid those taxes…
In this case, the IRS treatment is quite arbitrary, and his situation is due to tax year accounting and not just failure to reserve money for taxes. He should have been more aware of the consequences of his actions, but it’s a bit unfair that he is now bankrupt due to this sequence of events.
I would say it is more unfortunate than unfair. It seems pretty fair to me.
It was fair. He paid for a course in risk management and taxes that he’ll never forget.
haha its good to learn from your mistakes, but much better to learn from others.
https://www.youtube.com/watch?v=yvHYWD29ZNY
Ayy, where the gold at, baby? (Fuck I need gold for man?) Ayy, where the clothes at, baby? (Fuck I need clothes for man?) Ayy, where the dough at, baby? In the bank, you know I ain’t tryna blow dat, baby Ayy, we gon’ save that money (I’m so thrifty) Ayy, we gon’ save that money (I’m so stingy) Ayy, we gon’ save that money What we doin’? We gon’ save dat money