• For more information call 717.639.2550

  • With the announcement of the new cryptocurrency, Libra, being developed by Facebook, this stablecoin once again shows that tax laws are out-of-date with how the current market works. We have seen time and time again that our legal system is outdated in the way that they handle digital matters by trying to apply old laws to new technologies. This is true in cryptocurrency as well, as the only guidelines we have currently are from 2014 and tell us that Bitcoin and other cryptos are property.

    The Problem with the Property Definition

    The definition of property was an easy fix, a band-aid type of decision by the IRS in hopes that Bitcoin would die out and that they would not have to make any real decisions. This is my opinion solely, but I believe the IRS did not take Bitcoin seriously but wanted to collect taxes from the profits, so they threw something together. This gave them a basis to collect taxes, but they did not have to put in the extra hours developing new tax codes specific to the crypto industry because they thought it would phase out.

    However, cryptocurrency kept evolving and becoming stronger, and in turn, started to involve more people, more technologies and more situations where people were making money from crypto. It wasn’t just a simple buy at this price, sell at this price situation anymore where it was easy to determine the taxable gain. They never realized how quickly this technology would take hold and create multiple taxable situations.

    The property definition is very broad. Can it be treated like real estate? If so, does that mean a 1031 exchange can be done when buying Ethereum from Bitcoin? We already know this answer, as the IRS stepped up to knock this question down before everyone started submitting 1031s. How about forks? What about air drops and halving? How do we determine the basis there and when is it a taxable event? Again, there are multiple theories on both sides, but with the IRS not clarifying how to handle it, tax professionals are doing their best to interpret the existing code to the situation in front of them.

    Stablecoins AREN’T Currency

    Just like any other crypto, stablecoins like Libra are not a functional currency, though they can act like it. With current regulations, the IRS requires crypto traders and investors to report each transaction they perform with crypto. Every time that you exchange one crypto to another, buy something with crypto, or exchange crypto to fiat, these are taxable events. Will the IRS expect you to report every time that you use Libra for a purchase?

    In theory, if a person used strictly a stablecoin as their main form of transacting in the world, their entire financial record could be easily viewed by the IRS. Basically, you would be giving your bank record to the IRS and telling them exactly how much you spent at all times. Sure, on the 8849, you just list the date of the transaction, but in an audit situation, they could easily dig deeper here. And yes, any audit could dig deeper, but putting all your individual transactions from daily life is not the purpose of a tax form.

    Libra Coin Cannot Work in This Environment

    Libra Coin is an attempt to use an enormous database of current users to help spur along the growth of worldwide digital currency. While decentralized in name, Facebook will still be control of it and we know how that story ends. Also, privacy concerns are already plaguing this coin. People want to make money in crypto at this stage, and while yes, the end goal is a currency backed by the blockchain, it is not viable in the real work yet. Using a coin like this would be cumbersome and while the initial hype may make it popular, the hype will die off when people understand the true maintenance of using the Libra coin in the mainstream world.

    How to Change Crypto Tax Laws

    There is no perfect answer to this yet. One popular solution that is similar to foreign currency is that you pay taxes when you cash out. Sure, you put $1,000 in, take $2,000 out and pay taxes on $1,000 and that is done. Sounds easy, but there are a million loopholes in there with cryptocurrency unlike foreign currency. What happens if you buy something with crypto? Is that cashing out? If so, we are right back where we were before. And if it is not cashing out, look at this situation. You put $50,000 in and hit it big and have $300K in cryptocurrency now. You decide to buy a Lamborghini with that $300K all in crypto, never cashing to fiat. Now, you drive that Lambo into the ground and 10 years later, you sell it for $50K in fiat. If you are just looking at the value from when you put in to when withdraw, it is now showing a wash. So, in essence, you avoided a tax on the $250K in income by being able to drive an exotic sports car around. Somehow, I don’t think the IRS would agree with that.

    In the end, tax laws need to change, and they need to fast if we want to see real change in mainstream acceptance. Stablecoins released by the world’s richest companies won’t do the trick.