The following information applies to 2018 tax year and beyond. For information on cryptocurrency capital gains taxes for 2017, please read Cryptocurrency Taxes 2017.
2018 Income Tax Brackets
Before discussing specific tax law changes affecting cryptocurrency, let’s look at the new 2018 tax brackets. The number of brackets has expanded to seven as seen in figure 1. It is of note that these adjusted brackets will result in lower income tax for most taxpayers. The impact on short-term cryptocurrency capital gains will be equivalent since they are taxed as regular income.
The Net Investment Income Tax surcharge of 3.8% for high earners, the Obama-Care Tax, remains in place and unchanged for 2018.
2018 Capital Gains Tax Brackets
For long-term capital gains, the previous rates of 0%, 15% and 20% remain, but the income thresholds for each have been updated for 2018 as you can see in figure 2. For example, the threshold for 15% is now $38,600 for single filers and $77,200 for those married filing jointly. Compare this to 2017 thresholds of $37,950 and $75,900. These are just the annual inflation adjustments, otherwise capital gains tax rules are unchanged for 2018.
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Cryptocurrency Tax Changes For 2018
The recently passed tax bill will have specific impacts for crypto investors. The mandate of using First In First Out method for sales was dropped out of the plan before passage. That’s good news for investors across all asset classes. Using the Specified Lots method for sales allows investors to exercise some control over how much tax they will have to pay.
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No chance to use like-kind 1031 exchanges
However, there are two changes in the new tax plan that will directly impact cryptocurrency investors. The plan clarifies the use of like-kind 1031 exchanges for deferring capital gain tax. For 2018 and beyond, like-kind exchanges can only be applied to real-estate investments. No other asset class qualifies. Crypto to crypto transactions will NOT qualify for capital gains deferral. Both frequent traders and long-term investors in crypto will be impacted by this clarification.
Altcoins are typically purchased using bitcoin or Ethereum. Investors are now required to report each of those buys as a taxable trade. If you have bitcoin and later decide to buy altcoin X using that bitcoin, you’ll owe taxes on any gains in the value of that bitcoin even though you didn’t realize those gains in fiat currency.
Cryptocurrency Tax Fairness Act left out of 2018 plan
Further, the Cryptocurrency Tax Fairness Act, first introduced in September, did not make it into the final plan. We first reported on this possibility in late November in this update. The CTFA called for transactions under $600 to be excluded from capital gains taxes. The intention of the Act was to stimulate use of cryptocurrency as a transacting tool rather than a pure investment asset.
So in addition to clarifying that like-kind exchange rules cannot be used for crypto to crypto trades, the US also made it clear that there are no exclusions to taxation.
Clearly, the US has a long way to go before cryptocurrencies will be used for day to day purchases.
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