This year many people saw large gains in the newly emerging market surrounding crypto-currency, and you can bet Uncle Sam is looking for his cut. Here are some common tax questions and answers may have regarding the newly emerging asset class of crypto-currency and its treatment under the United States Tax Code.
Do I have to pay taxes on my Crypto-Currency gains?
If you are a United States citizen or resident alien you are taxed on all worldwide income, including any gains from the sale or transfer of Crypto-Currency assets like Bitcoin. Additionally, foreigners may have tax obligations for any trades that can be classified as income made in the United States.
It is equally important to remember in addition to the IRS, states with income tax systems are also expecting to see their fair share of revenue from any income received. Also, if you made money abroad with Crypto-Currency you may also have tax obligations to foreign governments as well.
Can my crypto gains qualify for preferential long-term capital gains treatment?
If you purchased and held Crypto-Currency assets for a period greater than one year, your Crypto-Currency income from sales, trade, and exchange qualify for special tax treatment as long-term capital gains. If you owned the assets for a period under one year the income from sales, trades, and exchanges will be taxed under the rules applying to short-term capital gains and be taxed as ordinary income. Losses with a replacement purchase within 30 days from the sale or exchange are treated as wash sales losses and not deductible until the replacement tokens are sold.
Can I use my crypto losses to offset my gains?
Crypto-Currency losses can be used to offset gains, and carried over using standard IRS carryover rules regarding short- and long-term capital losses. However, losses realized with a subsequent replacement purchase of the same Crypto-Currency asset within 30 days qualify under IRS rules as a wash sale and will not be deductible until the subsequent purchase is sold.
When is a sale or transfer of Crypto-Currency taxable?
Any time Bitcoin, Ether, Litecoin, or other Crypto-Currency asset is sold or transferred to another a taxable event occurs in which a capital gain or loss is calculated. This includes sales made within exchange accounts which are never removed from the owner’s bank accounts and the purchase of goods and services using Crypto-Currency.
How is cost basis in Crypto-Currency calculated?
The default method preferred by the IRS when calculating capital gains in indistinguishable assets, like most Crypto-Currencies and tokens, is the First-In-First-Out (FIFO) method. Using this method the first asset purchased is the first one sold. For example, if you purchased 1 BTC last year for $1000 and 1 BTC this year for $5000, then sold .5 BTC, the basis would be calculated according to the basis in the first 1 BTC purchased for $1000.
However, the IRS has not disallowed specific identification, a process by which particular tokens are tracked at the time of purchase and sale or transfer, which could provide serious tax advantages and enable crypto owners to potentially keep more of their money. Contact your tax professional to find out more about if this may be an option for you.
Can I write off charitable contributions made in BTC and other crypto-currencies?
Donations made in Crypto-Currency to a qualifying charity can be tax deductible. Coins and tokens which are considered short-term can have their original cost basis written off, whereas for coins considered to be held long-term (greater than one year) the full market value at the time of the charitable contribution may be written off.
How is Crypto-Currency mining income taxed?
Mining income is treated by the IRS as income on the day the mining income (in the form of Crypto-Currency) is constructively received. The amount of income is equal to the fair market value at the time the coins are received. This amount then becomes the new basis in the coins whenever they are sold.
For those mining coins with no easy exchange value, there are several methods available, such as tracking the value as whatever its exchange value is in another easily priced crypto-currency asset. Making these determinations can get complicated so be sure to consult a tax professional.
What happens if someone paid me in Bitcoin?
If you were paid by your employer in Crypto-Currency and the employer placed the information on your W-2, (or 1099 if an independent contractor) treat the income as you would treat any other regularly reported income.
If you’re paid in Bitcoin or another Crypto-Currency, the IRS treats this the same as any other received income. You must report the income whenever the payment is constructively received by you. The income reported can either be calculated as the fair market value of the goods or services, (which becomes your basis in the coins) or the fair market value of the Crypto-Currency received.
What if I received Bitcoin as a gift this year?
If you received Bitcoin as a gift you have no tax obligations, however, when you sell the coins you will owe capital gains on any appreciation. If you know the original cost basis of the gift that amount can be used to offset any gains.
What Records Should I Keep of my Crypto Currency Transactions?
The burden is always on the taxpayer to produce documentation to show any allowed deductions and tax information, so all relevant information should be kept in case of the event of an audit. These Items include:
- Records of buys, sells, transfers, and fees.
- Downloaded spreadsheets of exchange trading history.
- Wallet Transaction logs.
- Public transaction key logs for any coins spent.
- Receipts for purchases or sales made in Crypto-Currency.
- Logs of any crypto-currency gifted to a qualified 510-C(3) charity.
Can I perform a 1031 exchange of one type of Crypto-Currency asset for another?
Prior to 2018, the waters were murky as to whether the exchange of one crypto asset for another can be categorized as a like-kind exchange for the purpose of delaying income recognition under Section 1031. While clarification from the IRS has not been given, due to the differing nature of the various crypto assets, most exchanges of one crypto asset for another likely do not qualify under the strict rules set out under section 1031 as like property and thus exchanges do not qualify. Beginning on January 1, 2018, the “2017 Tax Cuts and Jobs Act,” (P.L. 115-97) makes clear that these exchanges are only available for real property transactions. Thus, going forward, the law is clear from this point forward that each exchange is a sale. Make sure to talk to your tax professional before intending to make any 1031 exchanges as this can be an extremely complex area, even excluding the complexity added by the crypto-currency market.
For more questions answered directly by the IRS see IRS Notice 2014-21, the Question and Answer portion of which can be found on our site Here. RMS Accounting has been in business for over 30 years and has always been at the forefront of the newest changes and developments in tax law. If you have any questions about your tax situation, in relation to crypto-currency, or any other matter call us at 1 (800) 382 – 1040.
This Article is for informational purposes only, and should not be construed as legal, tax, or financial advice. For the most up to date advice and information regarding the status of Crypto-Currency in the tax code, consult your tax professional.