Steem, Taxes, and the Crypto bear market
What can we do if we owe more in taxes than we have in income to pay it?
One of main disaster scenarios which many of us who traded are now facing is what to do if we owe more in capital gains taxes than we have in USD to pay it. This scenario is possible because just as you can take on capital gains which happens if you traded in 2017, and these short term capital gains increase your tax burden, it may lead to a situation where now the prices of crypto are way down and you simply do not have the money in USD value to pay.
In this situation what you're supposed to do no matter what is file your taxes. So no matter if you can afford to pay it or not you must file. The other situation which is possible is you can actually claim capital losses. I do not know the details of this exactly but it appears these losses can roll over but are limited to $3000 a year. It is entirely possible that some of us will owe $100,000+ in taxes and may not have $100,000 at this time. This is possible due to "short term capital gains".
Why I will avoid crypto to crypto trading going forward
Short term capital gains taxes in crypto are often the result of:
- Spending your crypto such as if you buy a cup of coffee each day.
- Trading crypto to crypto.
What can get most people in huge tax debt is to trade crypto to crypto. This of course is a mistake I've made myself. The solution to this is simply to never ever trade crypto which you have not held for at least 1 year. Long term capital gains rate applies to crypto you've held for at least a year. So if you've held it for at least a year you actually get to pay lower than income tax rates. If you are one of these traders who buy and sell different cryptos while living off technical analysis then you could be in trouble.
My solution is below:
- I will avoid spending crypto unless absolutely necessary for paying living expenses.
- I will avoid owing short term capital gains taxes, so that when I do spend it that I do so in the most tax efficient way possible.
Short term capital gains taxes can be avoided by simply spending only crypto I've held for at least 1 year. Of course this is a problem for people who don't have crypto they held for at least one year and it is also difficult on Steem. Steem SMTs in particular could be very problematic if people spend them like currencies yet they rise in prices like stocks. This could be a recipe for disaster and I would suggest consulting with your accountant on that topic. In general I suggest consulting with an accounting if you have crypto and have spent any of it or if you intend to spend it. The accountant can reduce your risk of underpaying and help you to comply with the complicated rules of the IRS.
Notice: My solutions offered are only what work for me. I do not give any professional advice on this topic so do not copy my solutions without asking an accountant.
Good luck to you. I hope you are somehow able to keep some funds invested in quality crypto assets until at least June, if not longer. I think prices are going to rise substantially in the coming months, perhaps as early as May. The longer people are able to stay invested, the better.
Forced liquidations of crypto assets to pay taxes should subside after mid-April. I'm reading from multiple sources that there is a lot of sizable interest in the over the counter market for bitcoin. Perhaps if some institutional investors are able to buy most or all of the bitcoin being sold by the Mt. Gox trustee, that will get rid of the overhang and allow the price of bitcoin to resume its uptrend, which will help quality altcoins as well.
There is no way to know if crypto will go up or down. Also that hypothesis could be nothing more than a myth. I don't think the majority of crypto traders are in the US. Most are in Asia.
Investing in crypto assets is risky. I'm only speculating with funds I'm prepared to lose because my potential losses are limited but my potential gains are not. I personally do not know whether there really is sizable interest in bitcoin in the OTC market, but some of the sources are credible. When U.S. investors stop selling to pay their taxes that will relieve at least some of the downward pressure. Nobody has a crystal ball, we'll have to see how this plays out. The strategy I'm pursuing works for me.
what about possibly claiming the flipside of each trade as an expense?
i.e. trade BTC for ETH - have to pay capital gains/losses on that - but then claim the ETH purchase as an expense...?
This is so simple but brilliant. Thanks for sharing your story. It is useful for the way I spend crypto this year.
That crypto to crypto tax is crazy! I think you should only be taxed once converted back to fiat
I mean it’s a risk buying and trading but profit is somehow still made . Some people make so much and don’t realize that will have to pay taxes . Even on coinbase , they do not provide you with a w2 tax form unless you have made or withdrawn more than 20K
Hypothetically, when I eventually convert to fiat, I’ll report that as capital gains, but the hundreds (thousands?) of little SBD to Steem and BTC/LTC/ETH to SP transactions that I’ve done can fly under the radar of overworked and understaffed IRS bloodsuckers.