After Coinbase released data on over 14,000 users to the Internal Revenue Service in 2018, cryptocurrency traders have been bracing for what’s to come next regarding IRS enforcement, as reported by The Wall Street Journal. The first and second wave of that enforcement seems to have recently landed in thousands of mailboxes nationwide.
IRS Letter 6174 is designed to motivate cryptocurrency traders to comply with federal tax laws, revealing just enough information to bring fear into the hearts of anyone who may have misreported income made from sales of cryptocurrency. Letter 6174 mentions “future civil and criminal enforcement activity” may be enforced, the first step in a compliance effort that could last for years as the cryptocurrency market continues to rise.
But it wasn’t just one letter. A second round of letters was also received by thousands of traders indicating that the information reported on their 2018 tax returns doesn’t match what the IRS received from their virtual currency exchange. It’s another red flag indicating the IRS is putting an intensified focus on the crypto market, which many have been expecting.
But does this mean profits made from investing in Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and other emerging digital currencies are going to be lost by investors? Not if the investments are made in IRS-compliant ways.
There are several companies, including iTrustCapital who has established itself as the frontrunner in the space, that are offering investors a new way to invest in cryptocurrency without having to worry about the threat of IRS interference. The company has recently launched a portal that allows investors to invest in cryptocurrency within their retirement accounts, meaning profits from the trades do not need to be reported on tax returns until the money is moved out of the account.
The goal is to make it easier and worry-free for investors to trade without having to report each transaction.
“iTrustCapital is disrupting the self-directed IRA industry by utilizing the power of blockchain technology to offer the lowest cost, most transparent and liquid platform available for alternative assets in IRAs. The tax benefits are tremendous,” said Blake Skadron, the Chief Operating Officer of iTrustCapital.
There are many benefits of using these types of trading platforms, including one key advantage is the elimination of complex tracking required for traditional cryptocurrency trades. The steps, outlined below, can get complicated:
- Trading cryptocurrency to U.S. dollars is a taxable event.
- Trading cryptocurrency to cryptocurrency is a taxable event.
- Using cryptocurrency to buy goods and services is a taxable event.
- A wallet-to-wallet transfer is not a taxable event.
- USD to cryptocurrency is not a taxable event but you do need to keep good records of the original buy price.
Even though not every move is a taxable event you still need to keep track of every move to figure out your cost basis for each investment, which takes a lot of time and energy for traders especially if the trading is done at volume.
Furthermore, as reaffirmed by Investopedia, the IRS has categorized cryptocurrency as property for tax purposes, which means gains and losses have to be reported as capital gains, which is no different than stocks and real estate. That means the IRS short-term capital gains tax on trades not held for at least twelve months can be extremely steep. Depending on what tax bracket and state the investor lives in means they could be taxed upwards of 50% on profits from cryptocurrency trades.
Buying cryptocurrency inside of a traditional IRA means investors can defer taxes on any gains until they begin taking distributions. Buying within a ROTH means investors can pay zero tax on any capital gains earned in the account.
“iTrustCapital integrates trading, storage and tax reporting for cryptocurrency assets into one holistic secure platform,” states Rich Hauschild who formerly served as Senior Vice President of Technology at PIMCO, one of the world’s premier fixed income asset management firms.