As cryptocurrency expands, some cautions for users & investors
by Benjamin R. Bostic
Recently, the Sacramento Kings basketball team announced players and coaches could opt for payment in bitcoin. In addition to Microsoft, Overstock, Subway, PayPal, Expedia, and Shopify are among well-known companies accepting either one or more types of cryptocurrencies.
Additionally, earlier this month CNBC reported Goldman Sachs had created a cryptocurrency trading desk. Not to mention Elon Musk’s May 8 Saturday Night Live appearance put the crypto Dogecoin on the tip of nearly everyone’s tongue.
Despite the growing acceptance and fascination with everything cryptocurrency, those thinking of investing or using this fledgling form of exchange need to be aware of the risks, including more than just the asset class’s renowned value fluctuations.
Despite having “currency” in its name, Bitcoin, Dogecoin and the rest have more similarities with stocks than cash. In some cases, crypto may qualify as a reportable offshore account, and this month a federal court authorized the IRS to identify taxpayers who conducted at least $20,000 of crypto transactions.
If you are thinking about getting into cryptocurrency or are already a buyer, the following are some tips to keep you out of tax trouble and avoid some nasty surprises.
Don’t treat crypto as cash
Rule 1: When trading one cryptocurrency for another, each trade must be separately documented and reported as a gain or loss transaction on your tax return.
That means if you use Bitcoin to purchase Dogecoin, you need to know the original cost of the traded Bitcoin and determine whether it results in a gain or a loss. Then you need to determine the value of the amount of Dogecoin you are acquiring, and that becomes your basis for the investment.
When you trade/sell the Bitcoin, your original basis and “sale price” will determine if you have a capital gain or loss. If you decide to cash out, you need to remember your basis and determine the value of the sold Dogecoin to figure out if you are declaring a gain or loss.
Notice that we are looking at three transactions in the above example to report on your tax return: Your initial Bitcoin purchase, trading the Bitcoin for Dogecoin and selling your Dogecoin for cash. If you decide to hold onto your Dogecoin, it is important to note that you are still required to report the sale of Bitcoin and pay any applicable taxes, even though you never received cash.
Additionally, as with stocks, the holding period determines if the gain/loss is short or long term.
The IRS is deadly serious about crypto investors reporting capital gains. But unlike stockbrokers who send you a 1099-B or a 1099-DIV for a mutual fund at the end of the year for tracking your profit and losses for your tax return, crypto investors have to track everything themselves. Crypto exchanges do keep track of transaction histories – to which the IRS has growing access – so investors need to keep accurate records.
- Helpful hint: This month, the IRS selected TaxBit as a partner to help taxpayers track their crypto transactions and file the proper tax forms. Read the announcement here.
Is your crypto exchange offshore?
Many virtual currency exchanges are offshore and may trigger Foreign Bank Account Report (FBAR) reporting requirements.
U.S. taxpayers are required to file for foreign bank or securities accounts that exceed $10,000 at any point in the tax year or risk stiff civil and potential criminal penalties.
Buyers using crypto beware
Thinking that buying that new car you have eyed is a good use for your suddenly flush Dogecoin account? You may want to think again: Come tax time, you may have to pay on the gain realized from the Dogecoin you sold to pay for the car.
Especially if you make a large purchase with cryptocurrency held for less than one year that has gone up in value, you could be looking at ordinary income tax rates on the gains on top of the usual sales taxes for your purchase.
You may save more buying goods and services using cash or taking out a traditional loan in some cases.
Because virtual currencies receive the same treatment as stock, you need to save every transaction email or document. It is crucial to document losses, because if they can’t be proven, the IRS will consider sale proceeds as taxable gains, without subtracting for the loss.
Underpayments and failure to file a correct or timely report can subject the taxpayers to penalties.
Anyone with concerns can consult with your Boyer & Ritter tax professional. Our professionals have the skills and capabilities to help cryptocurrency investors maximize their holdings and stay on the right side of the law.
Benjamin R. Bostic, CPA, is a director at Boyer & Ritter with experience providing tax and accounting services for individuals, not-for-profit, and closely held business clients. Reach Ben at 717-264-7456 or firstname.lastname@example.org