Crypto & US Tax Implications - Key Points from a CPA (me)
(Image from IRS.gov)
For most individuals, the last thing on our mind as we navigate the cryptocurrency world is "how much of this do I owe to Uncle Sam?" Additionally, some of you out there may even see Bitcoin and it's friends as a means to evade paying taxes on income or capital gains.
As your friendly Steem CPA, I'm here to tell you that thinking about these matters should be top of your mind. In order for cryptocurrency's to move in to the mainstream, it is important that we act like these are real stores of value that we are transacting in (even if our government occasionally gives us mixed messages!). To help you navigate this space, I wanted to provide some basics regarding how the IRS has stipulated we consider our crypto assets:
- Cryptocurrencys are NOT considered a "currency instrument" by your federal tax authority
- Rather, Cryptocurrencys are a "property" for federal tax reporting:
- If you receive Cryptocurrency for performing a service, it is taxed the same as you would for receiving cash. That is, whether you get $100 in cash for washing someones car, or $100 in Bitcoin, it is taxed as ordinary income in both scenarios
- If you purchase a cryptocurrency is where things get interesting. Since it is considered property, you do not have to abide by the FMV rules used for valuing "actual" currencies at year end
- However, you are required to report capital gains on your Schedule D of the 1040 (similar to what you would do for disposition of stocks or other property)
- Capital gains can generally be calculated by: (Value @ Disposition) - (Value @ Purchase (Cost Basis))
- Anyone who has faced capital gains before knows it is important to understand Long-term capital gains vs. Short-term. Generally, STCG become LTCG if you held the property for >1 year
- The tax benefit for holding on to a crypto to get LTCG will depend on your tax bracket, but generally the LTCG tax rate is much lower than that on STCG (taxed as ordinary income)
So, now that you know all the basics, you probably don't even know where to start calculating your ordinary income, STCG, or LTCG! I will provide some tips here, but understand that every situation is unique (and I have no doubt only captured a small fraction of them here):
- Check your exchanges to see how robust their reporting of historical transactions is. If they don't provide much documentation then you may want to think about using a different service
- It is very important to know the date on which you purchased your cryptocurrency (as mentioned, you want to avoid STCG wherever possible). I've found it's helpful to just make a simple spreadsheet with the date and amount of purchase, which I'll be able to use should I not be able to get that data from the exchange when tax time comes around
- Realize that the more you buy/sell cryptocurrency's, the more potential impact there will be on your tax preparations. I am not advocating any trading strategy here, but consider what impact your strategy has on what your taxes will be
- Identify a good source of historical price data for the currency's you hold. If you don't notate the price when you receive/purchase the currency, you may need to look this information up when tax time comes
- Most importantly, talk to your lawmakers and tell them that a more clear basis for cryptocurrency tax reporting needs to be defined in the law! In some ways (tax being one of them), having more regulation in this space will increase the adoption of cryptocurrency's and make all holders better off. If we can partner with our lawmakers to come to a good solution we can all benefit
Please let me know if this advice is useful, and if there are specific situations that you would like me to speak on. I appreciate any and all upvotes and follows
Disclaimer: although I am a registered CPA in the state of California, any thoughts above are merely my understanding of the US tax code and should not be considered tax advise. Further, I am not a Certified Tax Professional or Tax Preparer, and all matters related to filing of your taxes should only be done after consulting with the appropriate professional accountant, lawyer, or other party.
So, if you purchase a cryptocurrency with the gains from another cryptocurrency, is that a taxable event that occurs capital gains on the first cryptocurrency?
Or, is it only a capital gains event when converting it all back to fiat?
Hi @somethingsubtle, that is a great question, and another area that some specific guidance from the IRS would be helpful! That being said, I believe that we should follow IRC Section 1031, specifically the rules relates to a "like-kind exchange", wherever possible. Now, as a member of AICPA (American Insititute of CPA), I saw in a magazine that we actually sent a letter (signed by many notable CPA) to the IRS specifically asking if cryptos qualified for this treatment. I do not believe we have gotten clarification as to whether they agree or not.
Regardless, a quick summary of like-kind exchange: if you swap a piece of property for another similar (like-kind) piece of property, you can potentially defer the tax effect to a later point in time. Most commonly this is related to real estate property, but can apply in other situations as well. I think it could apply to cryptos, although between some it may be a stretch (obviously BTC and Sia, for example, have different purposes, so whether they are truly "like-kind" I'm not so sure)
Hope this helps! I will probably dive in to this specific more in future posts. Thanks for the idea!
Thanks for the insight. This was my line of thinking due to the similarities with real estate. Also just the general feeling that until the funds are back into fiat, that the gains are 'unrecognized' because the gains are still locked up in the 'property'.
I'm sure the tax man will be getting much more clear over the next few years.
Why isn't the IRS willing to clarify yet are willing to crackdown with a John Doe summons? What in your opinion is the priority of the IRS right now and how can we keep ourselves safe?
If it is "Like Kind" then it could also imply that blogging is like mining and all cryptocurrencies are taxed as if Bitcoin. Yet I don't see the logic of having it both ways for the IRS. If it's not like kind them Steem is not like Bitcoin and we have to pay taxes if we trade between Steem and Bitcoin right?
hi there @dana-edwards,
I agree - the John Doe seems like an aggressive overreach. I'm fully onboard with the need to get visibility in to criminals financial transactions, but something so wide and directionless seems like a real violation of our rights.
I think the best course of action we have to stay safe is just to be mindful of what we are doing and maintain records to the best of our abilities. I was audited once by the IRS, but actually found that they went away very easily when I quickly came up with the necessary documentation (not crypto related, however).
I think that the IRS priorities are tough to identify. They've been a bit rudderless over the past few years, notably as a result of staff cuts and the whole targeted auditing of republican non-profits/PACs. I can tell you that with less people they will be looking for the 'easy wins.' Specifically, if they see a potential large area to pull in some taxes (hint: look at the change in crypto total market cap this year) without having to send out a lot of people on the ground, they will jump at it. For now, we are safe behind the exchanges, but we don't know if that will last forever, which brings me back to my earlier point about just trying wherever possible (and within reason) to keep good records.
Your position about transacting between STEEM and BTC is correct. And to be honest, the forms required to fill out for a like-kind exchange are pretty laborious. Unless you are moving large amounts relatively infrequently between the two, I would say prepare to pay taxes like they are not (again, having good records here will help you).
I realize I've probably left you with as many questions as answers, but hope this helps :)
Cheers
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Hope this helps!
Great to hear the details from an actual CPA. This is going to be huge hassle for all the day traders out there, which is everyone!
Amen! I see a day in the not-too-distant future where the government/IRS starts looking in to some of the big wallets out there and comes a knockin' for their cut. You know what they say about death n' taxes...
I imagine once the IRS makes an example out of someone publicly, currencies featuring privacy like Monero and maybe Dash will sky rocket.
Thanks for the great info.
Upvoted and following you. I write a lot about cryptos and PMs.
Thanks @ajain
Much appreciated for the insightful post!
You've been upvoted, resteemed and followed.
You should post more about this stuff! It's really interesting to get straight from someone who actually knows! I saw online that if you're in the 10% or 15% tax brackets then the long term capital gains tax is 0%. Is this legit? I don't have to pay any capital gains tax?
Hi @jackeown, that is correct, and occasionally a source of much debate!
Awesome! You made my day!
Thanks, I have been trying to understand the tax issues associated with a Steemit account. I have been on a month now and been keeping track of what I am getting for rewards but am still learning and trying to understand what I need to be doing for reporting purposes...
Hi @ma1neevent ,
This is an issue that first made me decide to post about crypto taxes, as others are having the same question. It is definitely a gray area, that potentially could be interpreted as either ordinary income or even running your own business. For now, I'd recommend just trying your best to keep track of what you earn (translated to $ at the time of receipt, if possible) and when you earn it. On the bright side, with all transactions going in to a blockchain, there should be a record if you ever need to look back in time :)
yes I am doing my best. I reached out to my accountant but I think this whole crypto space is new territory for them... Thank you so much for your insight
Nice piece, as regarding digital currency, we the users should expect more government regulation in the nearest future because the more the world accept it, the more government will be interested in it.
Amen!
What are the tax implications of a hard fork? We just had a hard fork and suddenly our payout amounts look increased. Also previously we had a hard fork which changed the long term value of our Steem Power. Do the developers determine how much we might owe in taxes? These changes confuse me.
How about we make your content efforts here today futile and abolish the IRS.
I'm not trolling you I'm just feeling punchy
Has anything changed in your opinion, as far as what you have stated here; since the new tax law was introduced? Thank you for sharing such vital information! Keep it up :)