Ethereum (ETH) is beautiful, problematic dream
Through the use of smart contracts, Ethereum opens cryptocurrency trading up to a world of new possibilities, and today I offer only one tiny example. Ethereum allows for the trading of tokens, which are like cryptocurrencies… sort of, except that they don’t represent a new, unique blockchain and instead trade as part of the larger (much larger) Ethereum blockchain. Trading around in tokens is easy enough to do on a number of exchanges, provided you are willing to pay for everything in Ethereum… but of course that goes without saying. (?)
Still with me? Well here’s a very fine new kettle of fish for you. When trading Ethereum (or Bitcoin, for that matter) into and out of dollars, the IRS treats such trades as if Ethereum and Bitcoin were property, not currency, meaning you have to pay capital gains on your wins, but also (and why does no one ever mention this?) that you can use capital losses offset capital gains in other areas—stock and real estate, etc. Super.
But what about the tokens? What does it mean, tax-wise, when you trade Ethereum for a token, or one token for another? Are you meant to pay taxes on that? If so… how? Some lawyers at the University of Pennsylvania attempt to sort it out here. It’s tough, though. What’s funny, scary, and sad, all at the same time, is that even as the world struggles to figure out answers to this question and other equally (or even more) perplexing ones, tens of thousands of Americans need to know those answers in order to compute taxes due on December 31, 2017, a date which… well, you get it.