There is currently a copy of the reconciliation bill for the Senate to pass in order to move the Tax Cuts and Jobs Act to the final stages of becoming law. This is by no means a political post, but a professional one designed to give you the best idea of the changes to come and some ideas to help you manage your crypto tax bill in 2017 and 2018.
Generally speaking, the tax rates are going to drop for everyone. Here is a breakdown of the ordinary income tax rates and a breakdown of the capital gains rates. Short term capital gains will stay tethered to your ordinary income rates and long-term capital gains are still going to be at the 0%, 15%, and 20% rates.
Tax Brackets & Standard Deduction
Changes to Long Term Capital Gains
Long term capital gains brackets are increased, but the short term gains rates are still tethered to your marginal tax rates listed above.
State and Local Tax Itemized Deduction
State and Local Taxes are no longer going to be deductible on Schedule A as an itemized deduction, starting Jan 1st, 2018. This is going to be painful for those of you in high tax states like CA, NY, or MA (MA has a 12% capital gains tax on short term capital gains). If you think that you are going to end up itemizing for 2017, you will want to consider paying your estimated taxes for 2017 before the end of the year, as they deductible in the year they are paid, not in the year that the return is due. You will want to consider this if you are a single filer and made more that $100,000 between all sources of income. The other thing to consider is if you have real estate taxes, mortgage interest, unreimbursed employee expense, and charitable donations; you will want to maximize your itemized deductions. (Especially since mortgage interest and taxes are going to be limited, while employee expenses and miscellaneous item deductions such as tax prep fees are getting dropped from the Schedule A in 2018).
AMT and Net Investment Tax
Alternative Minimum Tax is here to stay, but the exemption amounts for it will be increasing. The Net Investment tax of 3.8% is remaining as well.
Like Kind Exchanges
Like kind exchanges are going away for any non-real estate assets, this was not a surprise to me, I never encouraged my clients to use like kind as a means to defer gains for crypto, but now it is definitively off the table for crypto as it is not considered real property. For those in shock the amendment is written as such;
“SEC. 13303. LIKE-KIND EXCHANGES OF REAL PROPERTY.
(a) In General.—Section 1031(a)(1) is amended by striking “property” each place it appears and inserting “real property”. “
Determining Cost Basis
I am giving this its own section since this could be the most significant portion of the tax law regarding crypto currency.
Here is the update from the reconcilliation bill:
EC. 13533. COST BASIS OF SPECIFIED SECURITIES DETERMINED WITHOUT REGARD TO IDENTIFICATION.
(a) In General.—Section 1012 is amended by adding at the end the following new subsection:
“(e) Cost Basis Of Specified Securities Determined Without Regard To Identification.—
“(1) IN GENERAL.—Unless the Secretary permits the use of an average basis method for determining cost, in the case of the sale, exchange, or other disposition of a specified security (within the meaning of section 6045(g)(3)(B)), the basis (and holding period) of such security shall be determined on a first-in first-out basis.
“(2) EXCEPTION.—In the case of a sale, exchange, or other disposition of a specified security by a regulated investment company (as defined in section 851(a)), paragraph (1) shall not apply.”.
(b) Conforming Amendments.—
(1) Section 1012(c)(1) is amended by striking “the conventions prescribed by regulations under this section” and inserting “the method applicable for determining the cost of such security”.
(2) Section 1012(c)(2)(A) is amended by inserting “(as in effect prior to the enactment of the Tax Cuts and Jobs Act)” after “this section”.
(3) Section 6045(g)(2)(B)(i)(I) is amended by striking “unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred”.
(c) Effective Date.—The amendments made by this section shall apply to sales, exchanges, and other dispositions after December 31, 2017.
This even has the Tax Foundation concerned (plan English, why reinvent the wheel). One thing to keep in mind is that even though the article mentions stocks, this applies to all Specified Securities, which includes per Section 6045:
(B) Specified security The term “specified security” means—
(i) any share of stock in a corporation,
(ii) any note, bond, debenture, or other evidence of indebtedness,
(iii) any commodity, or contract or derivative with respect to such commodity, if the Secretary determines that adjusted basis reporting is appropriate for purposes of this subsection, and
(iv) any other financial instrument with respect to which the Secretary determines that adjusted basis reporting is appropriate for purposes of this subsection.
Part (iv) is a pretty wide net for the Secretary of the Treasury to cast. Now that Bitcoin is going to have futures, the SEC is cracking down on ICOs, and the fact that the IRS is starting to dig into crypto tax evaders, I can see this being an issue that the IRS will not relent on. One way to get your maximum benefit out of the rest of the year would be to determine which accounting method gets you the most bang for your buck in 2017 and sell your high cost coins this year. From there you may want to consider keeping different blocks of your crypto in different wallets so that you can determine which block to sell with the FIFO methodology to get the best bang for your buck out of the specific wallet as they will all have different accounting periods compared to one lumped pool. You could start a regulated investment company, but you would looking at a tax bill of at least $50,000 quarterly; so you would potentially end up with more cost than potential savings unless you are a whale. This is going to hurt the day traders more than anything else. No more cost averaging, specific selection or LIFO. FIFO is the required accounting methodology for investments.
The summation of all the changes are maximize your deductions while you can in 2017 with the expectation that rates are going down in 2018 and beyond. As I mentioned, this is all based on the reconciliation bill passing before the end of the year, so I will be updating this post as things develop. As always feel free to reach out with questions or post them in the comments section and read the other articles we have posted for more crypto specific tax ideas.