Topic: ELI5 Why is eliminating like-kind tax that big of a deal? (Read 172 times)
Thanks for the responses guys. I do agree there are instances like you mentioned where it is more advantageous to have like-kind reporting, but in the grand scheme of things it seems to be a relatively minor difference. There is a lot of stupid FUD about "new tax laws" (I dont believe like-kind is a valid method for 2017 although some do it) and people crying that it will destroy crypto. Wanted to make sure I wasn't missing anything
Your net tax bill to this point is $12.50.
Now you have $150 BTC, wait for a few days and sell it for $130 USD. This is a short term loss of $20 and you can use 25% of that (-$5.00) to deduct your bill. Your total net tax bill is $7.50. You have a net gain after tax of $22.50.
Now you have $150 BTC, wait for a few days and sell it for $130 USD. This is a short term loss of $20 and you can use 25% of that (-$5.00) to deduct your bill. Your total net tax bill is $7.50. You have a net gain after tax of $22.50.
Lets say the "wait for a few days" pushed the sale into January. You have to pay the $12.50 tax "now", and carry a $20 loss forward for a year.
Or lets say you didn't sell BTC for $130. Instead you held on long term and finally liquidated at $100. Now you have no net gain on your trading, but you've paid tax! (You do have a loss that can reduce your future taxes.)
As you have shown, it doesn't change the amount of the tax or the potential return if you cash out in less than a year. But if you don't cash out for more than a year, it potentially changes the gain from long term to short term. That could increases the tax rate in your example from 0% to 25%.
It also increases the reporting burden. In one case you have to track and report 3 trades, and in the other you must report only 1 trade. If you do many crypto-to-crypto trades a day, you could end up having to track and report thousands of trades in a year. Furthermore, if you must pay a tax on every trade, then you must make (and report) additional trades in order to cash out enough to pay the taxes.
It also increases the reporting burden. In one case you have to track and report 3 trades, and in the other you must report only 1 trade. If you do many crypto-to-crypto trades a day, you could end up having to track and report thousands of trades in a year. Furthermore, if you must pay a tax on every trade, then you must make (and report) additional trades in order to cash out enough to pay the taxes.
I dont understand how there is any difference in tax for someone who isn't holding for more than 1 year and only dealing with short term capital gains. Can someone correct me if I am looking at Capital gains tax the wrong way? Here's my example:
All short term (less than 1 year) trades will be taxed at your ordinary income rate.
https://taxfoundation.org/2018-tax-brackets/
Lets say you're in the 25% bracket. You buy $100 of BTC. You wait a few days and then trade BTC for XRP. In that time frame your original $100 BTC is worth $110 BTC, so you pay 25% of the $10 which is $2.50.
Now you have XRP and wait a month and trade it back to BTC. In this time your $110 XRP climbed to $150 XRP. You have a capital gain of $40, and 25% of that is $10. Your net tax bill to this point is $12.50.
Now you have $150 BTC, wait for a few days and sell it for $130 USD. This is a short term loss of $20 and you can use 25% of that (-$5.00) to deduct your bill. Your total net tax bill is $7.50. You have a net gain after tax of $22.50.
In the current setting, You do the same trades as above but are only taxed when you come back to fiat, so you started with $100, ended with $130. Thats a $30 gain, and a $7.50 tax bill. Your net gain after tax is still $22.50.
All short term (less than 1 year) trades will be taxed at your ordinary income rate.
https://taxfoundation.org/2018-tax-brackets/
Lets say you're in the 25% bracket. You buy $100 of BTC. You wait a few days and then trade BTC for XRP. In that time frame your original $100 BTC is worth $110 BTC, so you pay 25% of the $10 which is $2.50.
Now you have XRP and wait a month and trade it back to BTC. In this time your $110 XRP climbed to $150 XRP. You have a capital gain of $40, and 25% of that is $10. Your net tax bill to this point is $12.50.
Now you have $150 BTC, wait for a few days and sell it for $130 USD. This is a short term loss of $20 and you can use 25% of that (-$5.00) to deduct your bill. Your total net tax bill is $7.50. You have a net gain after tax of $22.50.
In the current setting, You do the same trades as above but are only taxed when you come back to fiat, so you started with $100, ended with $130. Thats a $30 gain, and a $7.50 tax bill. Your net gain after tax is still $22.50.
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