By Ryan Lau | USA
Last week, after a hard-fought legal battle in both the House and Senate, the Republican tax bill passed by a narrow majority. Since then, conservatives claiming to advocate for a smaller government have touted the move as a political success, and the biggest tax reform in decades. Though it does reduce some personal and corporate income taxes, the bill is in fact incredibly disturbing on a much different ground. In fact, the very people who claim to be calling for a reduction in government size have just taken a major step in killing the future of cryptocurrency. This tax bill, in its reclassification of the 1031 Exchange law, has in fact done more to extirpate any trace of legal economic freedom than any bill since the Affordable Care Act.
What is the 1031 Exchange, and why is it important? Essentially, this measure, an important part of our tax code, allows for investors to defer capital gains taxes, in the event that an investor is selling a property with the direct goal of purchasing a new one. This has been widely used by house flippers and cryptocurrency traders alike. However, the tax bill has removed cryptocurrency from the list of acceptable 1031 references. Though the IRS has classified cryptocurrency as a taxable capital gain since 2014, it previously was only taxable when exchanging large amounts of it for fiat currency. Hence, reinvesting and exchanging between cryptocurrencies was treated as a 1031 exemption, though this is no longer true. Now, the IRS has permission to tax any and all exchanges between cryptocurrencies, which is an attack on individual liberty and economic freedom.
What does this mean for the future of cryptocurrency? Though small investors will not be significantly impacted due to the simple fact that capital gains tax has a minimum threshold, the impact of larger investments is astronomical. A day trader, who may exchange cryptocurrency multiple times in one single day, he may now find himself subject to a 20% capital gains tax for each exchange. This new implementation will naturally take away some of the perks of trading, reducing the demand for such exchanges. Though investors may still leave their money in one single cryptocurrency for extended periods of time, this action naturally has a smaller maximum profit margin. Even so, the IRS is tight their fists around long-term investments, with a new Senate bill that threatens the future of all cryptocurrencies recently passing.
Though some coins, such as Monero, have greater levels of privacy than others, this ability to hide from the state is quickly shrinking. Action must be taken immediately to protect the rights of cryptocurrency traders, whether it be done through the law or the market. Though investing cryptocurrency in a 401K or Roth-IRA would currently avoid these taxes, these funds have virtually no liquidity, and there are very few, bleak alternatives, such as surrender of citizenship. One should never have to give up their United States citizenship or invest in an offshore account in order to avoid mass theft on personal property, yet with the government’s recent actions, is this fate inevitable? The IRS is concerned with losing out on income, yet forget that they are merely a collective of individuals with no legitimate claim to any individual’s income. This must be recognized, and this bill altered, if we are to protect the rights of the individual.