Cryptocurrencies and the IRS: 3 Common Transactions to Consider
In his 11/29/2017 #AVC blogpost Fred Wilson brought up the issue of taxes (in the United States) for the treatment of certain transactions of Cryptocurrency (i.e. Bitcoin, Ethereum) (http://bit.ly/2zBdmJS). I believe he made one little mistake in his analysis but like he said, he isn’t giving tax advice. I am not either.
As a point of reference, my background and interest is that I am founder of Cryptokist, an Enterprise Blockchain Technology Solution Provider. We help Fortune 1000 clients access the profound power of the Blockchain and transform their business model before they are disrupted by a more trusted version of themselves. (http://bit.ly/Cryptoconomy) To the point of this article, I started my career as a CPA working at a public accounting firm and, as such, keep an eye on what the regulators say on tax issues surrounding Cryptocurrencies. (www.linkedin.com/in/digikist)
Though this is not tax advice (please refer to your own tax professional), I am interpreting IRS Notice 2014.21 as I see it. (https://www.irs.gov/pub/irs-drop/n-14-21.pdf) Though I am a CPA, I haven’t filed taxes for others in over a decade and, I repeat, do not rely on this as tax advice. But here are some important issues to think about reading this IRS Notice (The numbers in parentheses refer to the FAQ Number in the IRS Notice) for the most common transactions that occur (from my perspective) with Cryptocurrencies:
Receiving Cryptocurrency as a payment for work (11): Treat it as you would for receiving any wages. You have to value it at the time you receive it. If you go to Coinbase you can find charts for the most common Cryptocurrencies and determine the price on the day you received the Cryptocurrency https://www.coinbase.com/charts If you received lesser known, there are likely a few other places on the Internet to find out what the value was on the day you received it.
Remember you have to report the market value of the Cryptocurrency you received, not what you were owed by your employer. If they owed you $1,000 and in turn you agreed to take $2,000 in Cryptocurrency so that they wouldn’t have to pay you cash, you received $2,000 in taxable value, not $1,000. Your employer should send you a W2 as they would with any normal wages. If it’s a contracting client, you should receive a 1099 as normal for the value of the Cryptocurrency.
Mining Cryptocurrency (8): Mining cryptocurrencies isn’t ‘free money’. Well…it is free money but it is also taxable. Follow the rules in IRS Publication 525 — Taxable and Nontaxable Income. Essentially, you have to value the Cryptocurrency on the time received (I can’t even say the date, because there are such wild interday swings) and include that in gross income. For instance, if you mined a bitcoin on November 29, 2017, you have to include over $10,000 more on your gross income for your 2017 taxes. Not when you sell it (then you will have to include the gain). So even though you mined the bitcoin but didn’t receive any US$ for it because you held on to it, you still owe tax.
Selling Cryptocurrency (7): This is where I believe Fred Wilson made a slight error, though he did mitigate by saying it was only his opinion. Likewise, this is only my opinion.
Cryptocurrency is not treated as stock. It is not ownership of a company. You have no rights, no voting abilities, no shareholders’ meetings in the organization who created the tokens. You own an asset. You own property. Owning Cryptocurrency is more akin to owning a piece of art. The rules are similar but other considerations may come into play that go beyond the scope of this. You will have to fill out Schedule D and Form 8949 if you sold any Cryptocurrency. There are, indeed, distinguishable capital gains tax rates depending on short term and long term holding periods. Also, if you have created a business of collecting and profiting from Cryptocurrencies, you could likely be considered a dealer, not a collector or investor, and you may have vastly different expectations of your final tax bill depending on this determination.
I’m only touching on what I believe are the three most widely known uses of Cryptocurrency. Spending cryptocurrency gives you no taxable benefit as an individual but would be treated as any other expense if in the course of a business. But, let’s face it, with Bitcoin surging past $11,000 now (it was only $10,000 yesterday) and almost doubling in a month, who the heck is spending this stuff?!?
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Cryptokist, an Enterprise Blockchain Technology Solution Provider. We help Fortune 1000 clients access the profound power of the Blockchain and transform their business model before they are disrupted by a more trusted version of themselves.
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Cryptokist Technologies is a PROUD SUPPORTER of the 2017 Block & Coin Summit: NAVIGATING THE CRYPTOCURRENCY held on December 4th, 2017, featuring industry leaders, investors, ICO advisors, early entrepreneurs and crypto-enthusiasts assembled for an evening of networking and exploring trends in the Cryptoconomy. http://bit.ly/Cryptoconomy
