Scenario: Mass Crypto Use = Tax Complications


Current taxing laws would create a nightmarish experience, if and when everybody around the world begins to use cryptocurrencies.

Rules, regulations and the intricacies of fiat-currency would be far-fetched given the volatility associated with these digital currencies.  Lately, a new kind of debit cards, which are essentially validated cryptocurrency like Wirex, Cryptopay, acts much like any other payment card system. The conversion from digitized currencies into fiat is all handled in the backend thus not complicating it for the merchant or the consumer. Another step forward with cryptocurrency would be the direct payment of any of the decentralized assets held by an online buyer, like Litecoin, Bitcoin or Bitcoin cash into crypto wallet addresses.

Cryptocurrency trading, according to the Internal Revenue Service in the US is a controversial topic.

IRC Code Section 1031

The tax regulatory service notes in the above-mentioned section that taxes are paid against every type of investment property such as a sale in a business or property at the time of sale. This section – IRC Section 1031 – has been an exception allowing postponing tax payment via reinvestment in similar products of property which are judged as part of the “like-kind” exchange.

Thus, the deciding factor will be like-kind exchanges and allows taxable events only in the context of selling crypto against fiat. Thus, a tax is not incurred if cryptocurrencies are sold and other cryptocurrencies are bought. For example, Ethereum purchase with Bitcoin is non-taxable. However, if Ethereum is then exchanged for fiat, then the proceeds of sale is taxable. Again, this would be gain or loss of crypto asset in terms of fiat, at the time by which USD was invested.

However, experts believe that such like-exchange transactions cannot be considered by current regulation. ‘Crypto-to-crypto’ trades though identifiable as like-kind exchanges, but their qualification shall be “uncertain” the experts claim.

As a solution, like-kind exchanges which are simple and useful in the short term. However, the logical sequence of selling crypto for fiat, product-based purchase then it is a big challenge to track gains and to evaluate the fraction of the original costs, in terms of the original sale of fiat.

Tax on cryptocurrency has already caught up in recent times. In November last, a student had made profits via cryptocurrencies when prices were at their peak, converting $5,000 into $880,000 by end of 2017. However, 2018 eventually ended in a bear market causing untold trouble to the student. He was asked to pay taxes of $400,000, despite his desperate claims that he did not sell his cryptocurrencies for fiat.