Tax Cuts and Jobs Act and what it means for Crypto Investors

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.

Tax Rates

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.


Cap Gains.PNG

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;


(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:


(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.

Why your year-end summary matters for your Crypto Investments

Are you a rapid fire ICO investor who can’t catch a break? Did you buy into bitcoin near the recent high, only to see the price tumbling shortly after? If so, fear not, you might have some advantages in your losses but only if you harvest them. “But Drew!” you cry, “losses are always bad”. Fear not crypto investor, while you may have lost money on one transaction (or several); you may be better off taking your lumps this tax year in order to take your losses to offset your gains both this year and in the future.

Part of the reason behind this is if you have more than $3,000 of losses in excess of your capital gains, you will have to carry that loss forward against future capital gains. You will be able to take $3,000 of capital loss against your ordinary income each year if there is no capital gain to offset. Another important thing to consider is that your capital losses do not have a limitation to the number of years they can be carried over, so it is more advantageous to liquid failed ICO tokens now, especially if you think they are never going to recover in value.

The idea is to reap the benefits of the capital losses against any gains you have instead of holding on to worthless coins throughout the years. Even more so, the biggest reason you will want to harvest losses right away is that your losses will retain their character, meaning long term losses carried over to the next tax year will be applied to long term gains in the next year before reducing the short term gains, meaning that your tax advantaged long term gains will get reduced before your short term gains are. Don't sit on losses, instead of liquidate them when they are short term capital losses to preserve your long term capital gains first.


Dave has a long term capital gain of $2,000 in 2017, he has $10,000 of short term loss (poor Dave, this is why we do our due diligence on ICOs). His total taxable capital gain for 2017 is $0 and he can claim $3,000 of loss against his $50,000 of wages meaning his total income is $47,000 for 2017.  Dave carries forward short term loss of $5,000 to 2018. In 2018, he has the same wages but this time he has short term capital gains of $6,000 and long term capital gains of $6,000. His total gain is $1,000 short term capital gains and $5,000 of long term capital gains which at his income bracket would be capital gains tax of 25% on the short capital gains and 15% on the long term capital gains ($250 and $900 for a total of $1150). If his losses were long term when they were carried over from 2017 he would instead have a long term capital gain of $1,000 and a short term capital gain of $6,000. This leaves him with taxes of $150 and $1,500 for a total tax of $1,650 on his capital gains. Harvesting short term losses saves Dave $500 in taxes, illustrating how critical the type of loss is when we are carrying it over to the next year.  

As we see with Dave in the example, the type of capital loss matters .The ideal type of loss to be carried over is short term, not long term, as long term capital gains rates are tax advantaged compared to your short term capital gains rates which are the same as your marginal tax rates.

Now is the time to be looking at your portfolio and deciding whether or not you should be harvesting your losses. If you need help please reach out to us to give individual guidance on your investments and always talk to a tax professional before making any choices for your tax situation. Make sure you know the risks before investing in anything. I am not giving you specific advice in this article about your specific investments, merely proposing your tax benefits based on your capital losses.

If you want more info without having to talk to me, feel free to check out IRS Pub 550 (here) or schedule a free consultation about your crypto currency taxes. 

Doctor Tax; Or How I Learned to Stop Worrying and Love the Capital Gains Tax Part 1

A few disclosures before we jump into some more strategy for crypto currency tax

1: I am not a doctor

2: As with anything that is written online check with your tax professional or financial planner to see if it will make sense for you and your needs, or hire me to create a formalized plann based on your situation.

3: I do have holdings in cryptocurrency.

4: Make sure you know what you need for short, medium, and long term money before making any financial decisions.  

In most of the cases I have had talking with crypto investors, of panic selling to a huge short term gain here in 2017. There are things that we can do to reduce tax, some cost some money, some require some pre-planning, and some are on the frontier of the tax code as the IRS has given us sparse solid direction as to the tax treatment of crypto currency. All of these options have limitations and may not make sense for all traders

Strategy #1   The Panic Sale and Reinvest – Low Tax Risk

If you bought and sold within a year, and sold for more you bought, you will have a short term capital gain taxed at the rate of your ordinary income. If you did not pull any money out of the market but turned around and reinvested it all back into crypto currency, you have two options: Keep it in the market long term paying out of pocket for your taxes, or sell on or before Dec 31st to potentially have additional gain or worst case scenario short term loss that will offset some of your gains. This strategy only works with those that did not take a large chuck out of the market and put it into their pocket and for people who do not need to liquidate the investments for money needs in the next 6 months.

Strategy #2     Sell Crypto, Invest in Personal Businesses/ Real Estate Investing- Low/ Medium Tax Risk

If you are already own your own business, or have thought about starting a business, having the extra cash from crypto sales can allow you to buy assets that can be expensed out in the current tax year to create a loss or to purchase real estate that can have a loss on your tax return through items like depreciation.  With businesses, make sure there is what the IRS considers a profit motive per Elizabeth Giles V Commr. Memo 2006-15 2005-28 (Long case short dentist had a practice that made significant money, but a horse “business” that did not display a motive for businessper the tax court and lost the loss she tried to deduct).  The biggest take away from this is that you should be applying the duck rule (Walks, Smells, Sounds, etc.) and making sure that you are documenting your business with stationary, client meeting logs, and a business plan that you are updating yearly to show there is some thought in the running of your business. If you are not showing growth in 3 out of 5 years, you will be at a greater risk of having some extra scrutiny from the IRS.  You can purchase items that would be reasonable and necessary for your business (so no buying a lambo and claiming it’s for your courier service that only delivered one package for your neighbor).  Once you have found property that passes, you can take section 179 depreciation deduction or anything under $2,500 you can expense via special election on your tax return.  Now, if you ever sell the item for a gain on its basis you can have depreciation recapture or capital gains and there are some limits on how much you can take depending on the asset class and the total amount of depreciation claimed in the year.

A similar path can be taken with real estate, but it would require you to divest from Crypto currency and to have total adjusted gross income (AGI) for the year of less than $100,000 for full active real estate loss deduction of $25,000 or it will phase out and be reduced completely when you hit an AGI of $150,000. Real Estate is depreciated out over a significant period of time (27.5 years for residential rental) but if you do a cost segregation of the property you can accelerate depreciation on appliances and land improvements like fences and decks depending on the type of property.  The strategy here would be to use the gains from the sale of your crypto to pay the down payment on a rental and collect rents to pay the bills and make some money. You can pick up a loss and if you get to the point that you are ready to sell that piece of real estate, you could potentially qualify for a 1031 like kind of exchange if you use the capital gains on the sale to buy your next rental property within 45 days or having it held in escrow buy a company that specializes in 1031 exchanges.

There are many other strategies that I will release on a weekly basis, so keep an eye out for those. The next article will talk about using IRAs and switching from the investor status to dealer status for tax purposes and some higher level planning items. If you want to schedule a phone consult free of charge please shoot me an email, and I will be happy to talk with you about your situation free of charge.