IRS treats cryptocurrency as property, whenever you sell a crypto coin you must pay the short or long-term capital gains tax for it. Also since Jan 1, 2018, the like-kind does not work with crypto anymore.
So yeah IRS wants you to pay “gains” for your crypto transactions, but there is a loop hall in the law. And it’s not going to be easy to fix it.
The question is when do you need to pay? Is it from the moment you decided to sell your coins? Is it from the moment you logged in to your website?
IRS is using two methods to track your transactions. The obvious one is the public ledger, the place in the blockchain where all the transactions are stored. Whenever IRS see a new transaction on the public ledger, and they are capable of telling whos wallet made the transaction(btw it can work retroactively as well), then they can charge. Another less trivial way is the exchange place. Transactions on exchanges take place off-chain and are not recorded in the public ledger, but ever since IRS won the case with Coinbase, all the exchanges report all the transactions to IRS, it allows them to charge you there too.
So let’s go back to the “when” question, try to think when will I be charged in the next scenario. My good friend Mike is an Icecream owner, he except crypto as valid payment for his icecreams. I visit his shop every morning(he is really good!) and so I offered him not to pay every day but once a week. When will IRS charge me, when I buy my daily ice cream or when I make my weekly transaction? Don’t answer me yet. It gets more interesting next.
One day I won a bet with Mike, he owned me two coins after losing the bowling game. So I offered him to reduce those coins from my weekly ice cream payment, the result was me paying two coins less of gain tax to IRS.
Is it legit? Is it enforceable? To be frank, those are not easy questions to answer, but it led me to a bigger idea, which is more legit and more flexible.
I call it Decentralized Trusted Party(D.T.P), and this is how you are going to save on your taxes to IRS.
First, you allow the D.T.P to access your wallet and make transactions on your behalf. All your purchases will be made via the D.T.P. But here is the tricky thing. D.T.P can’t really access your wallet in any time. It can only do so once a month.
So when making transactions via D.T.P you will be agreeing to pay at the first of the month, no actual transaction will happen before that. If you should receive coins, the game works the same. You will only get them at the first of the month.
When the first of the month arrives, your income will be substituted with your expenses, and the only thing the public ledger will show is a single transaction from your wallet.
Confidence Coin is the first cryptocurrency to implement this technology, at the moment it’s under a pending patent and is scheduled to be released by May 2019.
Disclaimer: I am not a lawyer and cannot give advise on taxes.