France To End Taxation On Crypto-Crypto Transactions.
Why This Could Be a Game-Changer For The Future of Crypto!
Towards the end of 2018, a heart-wrenching story from a young college student surfaced on Reddit. After taking a risk and investing half his life-savings worth of $5,000 in cryptocurrency, he caught the insane altcoin cycle at the end of 2017 and watched his investment skyrocket all the way up to $880,000. He had planned to cash out as soon as he hit a million, ready to pay his way through college and be set financially for a long time.
Unfortunately, the market tanked shortly before and his $880k portfolio crashed all the way back down to $125k. Still sizeable gains for an initial $5,000k investment. Unfortunately for the hard-working student, the nature of crypto-crypto trades triggered massive amounts of taxable events and he was stuck with a $400,000 tax bill despite only having $125k left. How did this happen? How can someone owe more taxes than what they have? The answer is due to extremely complicated and quite infuriating tax laws.
The Complication of US Tax Law
U.S tax law is notoriously complex, and in many cases unfair. And the way it handles crypto taxes is no different. Under US tax law any crypto to crypto transaction is a taxable event. For example, if you were to trade Bitcoin for Ethereum, then Ethereum back to Bitcoin, and Bitcoin into USD, you would be liable for taxes on all 3 trades. So in the example of the college student. His investment of $5k skyrocketing to $880k means he’s liable to pay taxes on the $875k profit. After the market crashes, and he’s down to $125k, he still owes taxes on the $875k because he made a crypto-crypto trade, which is a taxable event. Many similar stories have surfaced and as a result, a lot of people have been discouraged from trading. Becoming a profitable trader is already hard enough as it is, add in all the tax complication and trading becomes even more impossibly difficult. “If you live in the US holding is the only viable option if you don’t want to give all your money to the government” — wrote user Chewy1358 on YouTube. His sentiment reflects a lot of people who now simply prefer to HOLD to avoid all the complications and risk of trading & taxation.
Why This New Law Matters
Portugal has already ended taxation on crypto-crypto transactions and now France, a major player in the global financial market, is following suit. Under the new tax law, individuals would only have to pay taxes when they cash out. Meaning the nightmarish scenarios of owing more taxes than profit will be a thing of the past. Tax law will be much simpler, easier, and fairer and this could potentially encourage more traders to put money in the market as well. With lots of big-name, institutional investors set to enter the world of crypto in the near future, simpler tax laws could be a game-changer. The US appears to have taken this into consideration as well, as last August a bill was introduced in Congress to “Allow the exclusion of gain or loss on like-kind exchanges of virtual currency”.
How This Affects Sentiment and The Market
News around taxes and regulation has shown it can influence the market from time to time. In mid-2018 cryptocurrencies soared when it was announced that the G20 would not be taking any regulatory measures towards crypto. But there was also understandable fear and negative sentiment in the market when major players like China and South Korea threatened to ban or severely restrict it. The recent news about France’s new, simpler tax policy hasn’t appeared to make any major impact on the market in the short term. But in the long term as more countries including major powerhouses like the US and Asia begin to follow suit, it could have huge ramifications in terms of encouraging big money traders to enter the market.
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Written by Ezra Yao