Top 3 Cryptocurrency Tax Loopholes That Do Not Work In 2018

Traders in the cryptocurrency realm are extremely appreciative of the non-regulation investment environment. But in the earlier days of Bitcoin, only the most experienced investors knew it was a real currency.

As the currency grows more mainstream and is accepted by larger corporations, there is likely to be more and more agencies regulating the way that it is bought, sold and exchanged. The policies are becoming more like that set-in place by governments and financial institutions.

And even the IRS is taking serious consideration into the way that people are making money off of the cryptocurrencies of the world. They are supposed to be taxed, however – no one is likely paying taxes on the money they make off of Bitcoin and the other cryptocurrencies of the world. Digital currencies are also so lucrative now, that the IRS is actively pursuing those people that have failed to report their earnings at all.

A lot of individuals remember the old days. A day before digital money in which a person could make millions without the IRS having any inclination as to what was happening with cryptocurrency. Now investors look for loopholes with the intention of completely avoiding the need to pay taxes. It’s not through means that are considered to be fraudulent, but instead to find ways to legally avoid paying taxes. But in reality, there are no loopholes that can make a person exempt from taxes.

Even though there are rumors of people in the cryptocurrency space, taking massive advantages of the system. And finding loopholes that protect them from the IRS and having to pay taxes, it’s not actually happening – according to many publications and reliable sources. In fact, it’s said to be a pipedream of sorts that isn’t realistic by any means. There is no clear indication of how anyone is avoiding paying taxes.

Tax evasion can get you in a lot of trouble, plain and simple. And that is even if it’s accidental, you can still get in a lot of trouble. There are a lot of steps that can be taken to help protect yourself from being liable to the IRS for your tax problems. Planning is everything, and there are specific needs that can be met by service providers for cryptocurrency investors.

There are those like the individuals at Happy Tax that can help you reduce the risk of exposing your virtual wallet and at the same time not make common mistakes that a lot of individuals are making when it comes to cryptocurrency.

Top 3 Cryptocurrency Tax Loopholes That Do Not Work In 2018:

1. Purchase Cryptocurrency With a Retirement Account

A lot of people understand that retirement accounts are like IRAs and 401Ks or ROTH investment options. They give tax breaks that help people save money for retirement reasons. And, many cryptocurrency investors also think they can avoid paying taxes because their digital currencies are making money through accounts set up for retirement. But this is a process that is not as easy as one may think.

When an American citizen or resident wants to by cryptocurrencies through an IRA, they need to first transfer funds off shore. They also need to setup an LLC that operates in a country with zero taxes. The company that is offshore will need to then open and bank account offshore that works with a digital currency and wallet to complete the transactions on the behalf of the individual.

It sounds complicated and that is because it is, you need to have help from an attorney in the United States and a foreign counterpart in the country that you’ve chose for hosting your IRA. There a lot of legal fees as well that will start to build up fast. And without understanding the way that transactions work internationally, there’s a chance it will not work out. If the person hired to set up the IRA chooses to bail out and run, you can’t really do much about it.

The complex nature of the situation and potential for fraud are only the first of the many problems you’ll have to face. You’ll also have to learn how to take care of and handle your own investment. The IRS will not allow you to borrow money from the account or make a profit from it in any way. It’s just like any other personal investment company would work.

Also, the total contributions that happen on a yearly basis can never exceed $5,500 if you’re less then 50 years old. After that, they cap at $6,500 and that is only the beginning. Even if you make it through the challenges and red tape, there is still a strong chance that you’ll have to pay taxes on any capital gains made.

2. Buying Cryptocurrency Through a Life Insurance Policy

Life insurance policies are similar to retirement accounts when it comes to tax breaks. A good example is that if you have a life insurance policy set up that is held for a while, then cash it out – you’re allowed to have a tax deferral that is like an IRA. You’ll still have to pay taxes on it, but you can defer it to a later date. There’s not a tax break, you’ll also still have to work with an offshore bank account.

If you never cash it out, it’s passed on to your heirs. And like property, your heirs won’t have to pay taxes on any increase in value that occurs for the currency held. It’s sounds like a genus plan, but the problem is that you’re dead. You don’t have to worry about taxes anyway, you’ll never be able to spend the money you’ve made anyway. You may as well pay your taxes and enjoy the money.

And, while leaving cryptocurrencies to your children or heirs sounds great, it’s not as simple as it seems. Most off shore holding policies have a minimum amount for deposit at around one and a half million dollars before they even consider it. This is a large enough amount to stop most people from even trying. It’s better for most people to just pay their taxes and avoid all the issues.

3. Like Kind Exemption Claims

The IRS has already previously claimed cryptocurrency is a form of property. And it’s given the false belief for many investors that they can simply swap Bitcoin for other coins like Ethereum and then rely on the like-kind exchange under section 1031 of the tax code. The law is based around exchanging one type of investment in business for another. The premise is that if you exchange one product for a similar one of more value, you don’t have to pay taxes. And this only works as long as the two products are the same type of nature.

Investors thought this is the way it would work – but the IRS sees any type of exchange with Bitcoin as a taxable event. And it doesn’t matter if you buy a cup of coffee or trade it for another type of altcoin. The transaction doesn’t work the way investors would like it to, it’s treated as a sale rather than a property for property transaction.

Investors who want to rely on this law, are hard hit in 2018 as the federal tax reform has changed the way things operate. These changes are now specifically limited to real estate only. And this in turn closes the loophole altogether, making it completely obsolete.

Call a Professional When in Doubt!

Most people are very new to cryptocurrency, but the IRS is not. They’ve been watching transactions for years now. And they are not letting anyone get away with the tax evasion through loopholes in codes related to taxes. Investors who started early and though they were safe may be mistaken. And now they are likely being chased by the IRS for their mishap, which will likely lead to penalties as well as paying for back taxes.

The point is that when the IRS comes looking to assets or attempting to get you to pay, it’s best to be prepared. CryptoTaxPrep.com by Happy Tax are dedicated to helping you with your taxes related to digital currency. They can help you stay prepared in every way when it comes to dealing with the IRS and staying out of trouble because of cryptocurrencies.