What is a taxable event?
Is cryptocurrency a legal tender?
How can I guarantee I am IRS compliant?
Are there ways I can continue to trade my coins for profit without paying taxes?
What happens if the IRS investigates my tax return?
If you have any of these questions, watch the video below where we answer them all and more! The regulatory environment is complex by its very nature, but we break it down and make it easy to understand. In this video Creighton pulls info directly from the IRS hand-book to inform you of how the tax-man views cryptocurrency.
Hello everyone, welcome to another video. I hope everyone is enjoying their weekend it is Saturday the 30th of September, 2017, meaning that tax season is just around the corner. Now we have started to receive more and more questions regarding taxes as they relate to Bitcoin and other cryptocurrencies – and that’s what prompted this video. We’re going to outline what constitutes a taxable event and what constitutes a non-taxable event and how you can ensure you are IRS compliant when it comes time to file your taxes.
IRS is aware that virtual currencies may be used to pay for goods and services or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and / or a store-of-value. There are a lot of people out there that say Bitcoin is not a store-of-value. However here we have the IRS defining cryptocurrency as a store-of-value. In some environments it operates like real currency and is customarily used and accepted as a medium of exchange, but it does not have a legal tender status in any jurisdiction. In the eyes of the IRS, cryptocurrency is not a legal tender.
Virtual Currency then has equivalent value in fiat currency for it acts as a substitute for real currency, referred to as convertible virtual currency. Bitcoin is but one example.
How is virtual currency treated for federal tax purposes?
For federal tax purposes, virtual currency is treated as property.
Is virtual currency treated as currency for the purposes of determining whether a transaction results in foreign currency gains or loss under U.S. federal tax laws?
The short is answer is no.
Must a taxpayer who receives virtual currency as a payment for goods or services include in computing gross income the fair market value of the virtual currency?
Yes. You should maintain a ledger of all of your transactions to know the value of the currency when you purchased it and when you sold it.
What is the basis of virtual currency received as payments received for goods or services?
The basis of virtual currency that a taxpayer receives as payment for goods or services is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. Like I mention, you need to keep a very accurate ledger of all of your transactions, this is the best tip to help yourself stay IRS compliant.
How is the fair market value of virtual currency determined?
For U.S. tax purposes transactions using virtual currency must be reported in U.S. dollars. Therefore taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If the virtual currency is listed on an exchange an exchange rate is established by market supply and demand, the fair market value is determined by converting the virtual currency into U.S. dollars.
Because cryptocurrencies aren’t recognized as a legal tender, you always have to convert your holdings to native fiat.
Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?
Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has a taxable gain.
So let’s break the down…
Say you paid $4,000 per Bitcoin and you have 10 of them. Your Bitcoin appreciate in value and you get a car worth $50,000. The transaction represents the realization of a $10,000 profit that is ultimately taxable.
What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?
If you buy Bitcoin or any other cryptocurrency for the purpose of investing in it, at some point you will have to liquidate and exchange back to U.S. dollars. As soon as the happens, you need to compute your gain or loss as it relates to your original purchase of the cryptocurrency.
Does a taxpayer who mines cryptocurrency realize gross income upon receipt of the cryptocurrency resulting from these activities?
Yes. When a taxpayer successfully mines cryptocurrency, the fair market value of the cryptocurrency as of the date of the receipt is includible in gross income. By verifying transactions through various consensus methods such as Proof-of-Work, the rewarded crypto is taxable in the eyes of the IRS.
Here we have covered our 4 primary taxable events:
- Anytime you receive cryptocurrency in exchange for services.
- Anytime you exchange cryptocurrency for any kind of property that has value.
- When you sell your investment in exchange for fiat currency.
- When you receive a block reward for mining cryptocurrency.
Is a payment made using cryptocurrency subject to information reporting?
A payment made using cryptocurrency is subject to information reporting to the same extent as any other payment made in profit. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using cryptocurrency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee.
Basically any transaction you conduct on the blockchain ledger that carries a $600 or more present-day market value, you need to record and report to the IRS. Obvious circumnavigation or loopholes are always noticeable and not something we recommend anyone partake in – that is conducting numerous transactions under the $600 threshold to withhold your actual gains or losses.
One of the largest wallet providers in the U.S., Coinbase, has resisted several probes from the IRS and claim that transactions under $20,000 are exempt from IRS reporting. IRS did however release a statement that said they have user information on over 25% of all cryptocurrency and Bitcoin transaction conducted in Coinbase and 4 million other data points that are scraped from all over the web. Point is… Report and pay you fair share of taxes.
Everything you do on the internet is traceable, and seeing as cryptocurrency is the “money of the internet”, it’s wise to keep a clean and honest slate.
So let’s talk a bit about non-taxable events. I’d like to talk about Tether because for any small transactions (transactions under $600), this is really something ideal.
1 Tether coin is always equal to 1 U.S. dollar. This let’s you take some risk of the table by holding and transacting in a relatively more stable environment. Tether integrates with most major exchanges such a Bittrex or Bitfinex to name a couple.
We also recommend using tools like Bitcoin Taxes that will help consolidate your reporting and will even integrate with other more common tools such as TurboTax® for expedited filings.
Cryptocurrency Taxation Part II: 1031 Exchange (Update)
We did not explain like-type exchanges and the 1031 Exchange very well in the video and needed to clarify, so here ya go. We were fortunate enough to speak with Patrick Camuso, a CPA specializing in Blockchain, about these issues, and he was incredibly helpful. If you would like to visit his website for further information or check out his YouTube channel, you can find all of his information below.
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