Taxing Crypto a Nightmare in Waiting


If you have been thinking of using crypto as a vehicle to make payments and other transactions that will be exempt from paying tax, you need to think twice. Tax returns are set to become a reality; the virtual currency adoption is real and do not expect to use cryptocurrencies without being hit by the tax man at some point.

Every government is salivating for the lucrative blockchain industry; there is no way you can use digital coins as a day to day payment method without being compliant with the current local tax regulations. The more the crypto uptake rises, the more its taxing process becomes a nightmare.

Real Crypto Reality on the Ground

The crypto hype has over the last ten years turned to reality and the industry is promising and its potential undeniable. However, the current industry frameworks need a lot of reworking to take in to account the tax requirements that comply with the new payment types.

The current crypto user feels the current usage is just like fiat; businesses can still use plastic cards which are tied to crypto rather than traditional money. However, accessing digital money holdings is different from accessing a bank account. It will not be as easy as just sending your digital asset address to the seller when shopping online especially with the anticipated crypto regulations.

Crypto Taxation Simplified

The Internal Revenue Service (IRS) believes by using exchanges, taxation can be manageable but complex. But as mentioned in the IRC code Section 1031, it can also be controversial.

Classifying cryptocurrency trades or exchanges as like-kind exchanges might be a manageable, yet controversial, future solution. The Internal Revenue Service (IRS) mentioned this topic under IRC Code Section 1031:

“Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.”

However, this appears to limit trades between fiat and crypto and not the other way round. This complicates the matter when making payments for goods and services.

According to like-kind exchanges, taxes can only be applicable when transacting crypto to fiat and does not apply between cryptos. The like-kind model might not be able to work as long as the current regulations are still in place as explained by Cross Law Group:

“The bottom line is that crypto-to-crypto trades can technically qualify as like-kind exchanges, but such qualification is uncertain at best.”

Crypto Market Volatility Complicates its Taxation

The market volatility makes it hard to track and record events; when one buys low and a few days later the price appreciated, taxing such scenarios can get complex. In most cases, losses or gains might not trigger any taxable events.

Not all exchanges keep customer transaction records making it difficult for the tax man to track all users. There are users who store the crypto holdings in cold wallets where they can easily swap their holdings at will. Secondly, not all exchanges accept the very many coins in the market today; there are restrictions with Bitcoin being the largely used coin.

Given that all transactions are recorded in a public ledger, there is a need to come up with the right tool to simplify the taxation process and until that is done, the user will continue to enjoy tax-free transactions. However, crypto has a long way to go before it becomes the only way to make payments.