IRS reminds taxpayers to report virtual currency transactions
irs.gov
irs.gov
If the reporting requirements seem to be literally impossible to comply with, this doesn’t mean you conclude “so I don’t have to pay taxes”. It means you should conclude “I have to pay the maximum taxes possible under the worst case scenario because I don’t have the records to prove my version of events”.
It has nothing to do with crypto, lose basis in your stock and you assume no basis (obviously you make best guess and hope To not get audited, but once audited, you take no basis).
Taxpayers only need to pay the MINIMUM amount of tax required by law, not the maximum. If you are audited then we will tell you why you owe additional tax. No, you will not go to jail for paying less tax but upon audit you will be required to pay the deficiency or provide additional explanations/documents etc. Then you can introduce any counter arguments like you didn't know such a law exists, the tax code is ambiguous etc. Making these types of claims will help to provide case law to clarify it for others as well as for auditors.
I agree that the taxation of crypto related transaction is quite ambiguous when you start getting into the theoretical nature of how the transaction is conducted.
1) If one had used bitcoin as a currency (bought pizza, bubblegum, etc.), are these new "treatments" of cryptocurrency implying one has to report each of these purchases and the tax implication there in?
2) Lets say you are a miner and mine a bitcoin a month (I know not realistic but helps simplify question). Now, lets say you buy pizza with bitcoins from your wallet every month. What is the cost basis to use? The price is pretty volatile .. so what the heck are you supposed to do?
If you run a small business which grosses $X,000 per month, you will a) find that that is not that rare and b) benefit from keeping appropriate records of your expenses, including electricity and depreciation of expensive equipment, such that you can claim them on the tax return for your business each year.
You might choose to swap assets of the business directly for pizza but this is, in general, not a good decision relative to swapping them for money and money for pizza.
Your cost basis in intellectual property is typically the marginal cost to produce it. You can run the question of how exactly to bookkeep it past your accountant, but the profit of a mining businesses with $8k gross revenue and $2k of expenses per month should be $6k.
If you believe your mining business to have insurmountable challenges in bookkeeping at the scale you’re operating it at then maaaaaybe you should hire professional help or exit the business.
Apart from patio11's good advice I would add that it may be important (depending on your tax laws) to record the value of the asset (i.e. BTC or whatever) when you received it and the value when you sold it. The difference may be capital gains/losses and might be taxed differently. You also need to understand if the accounting is LIFO (the last BTC you received are sold first), FIFO (the first BTC you received are sold first) or cost averaged. Some countries require that you declare which system you are using before you do any transactions, so some caution is warranted. I don't know how the tax system works in your country so this is not advice. See paragraph 1 :-)
P.S. I've never bought nor sold crypto currencies, but my small consulting business is primarily overseas work, so I have to do a lot of FOREX.
Wish there was a dummies book on this. I do have an accountant btw but want to learn myself.
Republicans absolutely, unequivocally, believe in class. Better people have more money. Period. They can buy better products with that money - otherwise there's no point in being wealthier than others. Democrats are kinda sorta sometimes maybe occasionally OK with this but then abruptly not OK when the political winds change a bit. The party of ambiguous ethics are the Democrats. The aristocrats' party is the Republicans.
Directly asked, both party types lie. But if you look at a few dozen policy positions an individual policians has, with emphasis on the less conventional (the ones with ready talking points) ones, it's really easy to triangulate their positions and contradictions - for a political scientist.
edit: Let me be even more detailed. I had to have my accountant rework my taxes 3 times. Once because of a retroactive law change after the end of the tax year. Once because of the inconsistency I discovered in official documents. And once because ETrade's documents and my employer's conflicted. Both of the latter were prepared by professionals. That's pretty typical of my filings. If it's so complex that all of that is fairly routine, that IS the government's problem. I have no problem keeping track of my own records; in fact my own record keeping and fastidiousness led to the discovery of all 3 of those problems.
Does that mean it might be safer to be less fastidious so that no-one can uncover records that never existed?
Having a CPA doesn't help at all whatsoever to compensate for bad record keeping.
There are other ways to do this that would be simpler, e.g. tax equals 1-2% of the asset value per year, rather than taxing the income. This isn't fundamentally different from property tax computation.
So penalize everyone in down years when their stocks lose money, plus wipe out a ton of potential growth in 401k accounts? At least, that's what it sounds like to me.
Almost everyone does better with Roth versions of IRAs and 401(k)'s anyway. Pay the tax up front, no tax at the back end, and thus basis and record keeping isn't even relevant.
There's a bunch of ways to simplify this while also making it fair if it weren't for the greedy rich people who want regressive taxes, i.e. flat tax.
There are also tools like www.cointracker.io out there to simplify the complexity of these crypto taxation rules
Shouldn't that be "pay the minimum amount that (1) you can reasonably argue you believe is what you owe, and (2) is close enough to the maximum possible under the worst case scenario that you will not be subject to underpayment penalties if you are audited and they determine you owe the maximum"?
It is unrealistic to expect people making frequent trades to carefully document every trade (unless perhaps that is their profession). It's even worse for cryptocurrencies, since the value of the outcome of a trade is entirely relative to some other more established asset (such as US Dollars).
If you trade USD for BTC, then some time later trade BTC for XRP, then liquidate that for something more obscure (like cV), determining the value is really difficult. You would have to lookup the currency pair rates for each pair in a given trade, as well as some chain of currencies which can be associated directly with USD. Not only would that be highly inaccurate, but it could easily be argued very differently depending on which exchange(s) you used (since at any given moment, the difference of rates on different exchanges can be very significant).
I think as far as the IRS is concerned, unless you're obviously getting rich, if you can just show you made reasonable effort to assess and report what you earned, they'll be satisfied. But if they think you're trying to fool them, they make take personal offense and put far more resources into nailing you than you think it's worth in lost tax revenue.
If your cryptocurrency brokerage isn't doing that for you, move your money elsewhere. If you can't find a brokerage that does that for you, maybe you should start wondering what other important controls are missing from your brokerage. Just saying.
A brokerage company operating outside of the US should still be sending you relevant local tax forms. If they are operating in a tax haven, well, maybe don't do business with companies operating in tax havens if you want your US taxes to be easy.
Only during a war, with the demands it places on the public conscience to make sacrifices, would the population acquiesce to an institution so contrary to natural rights and so pernicious to liberty.
A tax does not relieve financial stress in any general way. If it did, we would constantly raise taxes.
What a tax does is enforce a collective use of financial resources. The demand for such enforced collectivism increases when a threat emerges that can only be adequately dealt with using such collective action.
A foreign nation, engaged in organized violence, aka war, against a nation, is the most extreme example of a situation where enforcing collective action provides a benefit to the majority, and thus that's when people are most likely to sacrifice their liberty and accept a new tax.
There are quite a few countries which do not have global income reporting requirements. Singapore is probably the most notable example.
Some European countries absolve non-domicile residents of the requirement to report global income in exchange for a flat annual fee, like 100,000 EUR.
So it is possible to live a life without being forced to surrender your natural rights like your wealth and your privacy, but it's expensive.
That's hardly surprising. You chose a search term that was very likely going to get hits with anti-tax types.
If you simply searched "pernicious" you would find it being used in many, ideologically diverse, contexts.
Your real problem is with the position espoused (that the income tax is anti-liberty). The use of the term "pernicious" is incidental to that.
EDIT:
The top results I'm getting for "pernicious to liberty" aren't even dominated by tax-related articles:
So then don't use those brokerages if you are a USD customer?
Crypto takes out the need for middlemen like brokers. You can use them, but you don't have to either. Even with them, unless you're trading for USD at the time it's a standing question of what the USD value was at the moment. This isn't like, "use the price in the WSJ that morning".
It's magical thinking on the part of people selling digital assets that somehow the tax codes of any country don't apply to them
If you don't know the USD value of what you are trading then you are a pretty poor trader...
OP's argument that "it's too hard" is not adequate justification for not obeying tax laws.
E.g. I had a really chaotic year once, and instead of getting in a state of panic, I figured out the money I'd put in and what I got out, and documented that, wrote a letter explaining why I was unable to document the trades, explained that the final number I came up with would cover my full profit, promised to assist to the extent of my ability if they needed more details, and presented my taxable income on the basis of that, and they just sent me my tax statement without ever asking for more info - after all I'd openly reported income they'd otherwise not have known about without going looking (the brokerage account was in another country).
As long as it doesn't look like you're trying to be overly clever in strategically omitting information, in general presumably they'll have bigger fish to try (namely the people who look like they are being overly clever in leaving out information because they're actually hiding something major) than someone who looks like they're trying their best...
This sounds like a nightmare since you don't have exact timestamp data for anything really.
>At the advice of my friends, I took most of my savings and bought 8 bitcoins back in early 2017 for about $7200. You can imagine how I felt when it went up. Around December 2017, I got caught up in the altcoins frenzy and sold most of my bitcoins (about $120k worth) to buy a bunch of different coins. I didn't know this back then but it looks like I owe income taxes on those trades,
Thread: https://www.reddit.com/r/personalfinance/comments/84huks/i_j...
You can’t convert your real estate into stock without paying taxes anymore than you can one crypto coin to another.
Seems like people should have found better exchanges that would have helped facilitate tax reporting...
Not saying it affects the situation, but it is still a different type of transaction in the way that a lot of laypeople would think of it.
EDIT: even if he didn't convert to fiat, the exchange of BTC for an alt-coin is a taxable event. That makes sense because otherwise you could, in theory, convert to a dollar-pegged crypto like Tether and defer taxes indefinitely.
The only way that I know of that you can legally enrich yourself without paying taxes is via a direct gift and that’s because the giver pays tax instead of you.
A common misconception is that you have to pay tax on every gift you make, but as long as you’re under that $5MM all you have to do is report it.
He'll owe taxes upon withdrawal in the future, 17 years from now at the earliest, but he'll also have full freedom to use the money any way he sees fit. So school, starting a business, buying a house or letting the investment ride until retirement.
It's a risk if the kid doesn't end up going to college; you end up paying, I think, regular taxes on the earnings plus like 10% penalty.
Still, 17 years of tax free growth would be a pretty good reward if the kid does go to school.
So I can give my son $14k, my wife can give my son $14k, and we can both given my daughter a combined $28k all without even registering against the $5 million lifetime exclusion or paying any gift taxes. And couples can do that every single year for decades, which adds up to millions even without touching the exclusion.
Importantly, per person receiving. In principle you have a virtually infinite tax-free gift giving exception available if you distribute your assets to enough people.
But that isn't really relevant for the average person - gifts below the annual exclusion amount (something like $14k) are exempt from reporting/recording/tallying at your death. And this does apply per each pair of people per year, so in your scenario BG would have nothing to report.
So if we have 5 children and 10 grandchildren we are giving away $450,000 a year to our family and still get another $5M when we die gift tax free.
Additionally, below a certain (low) level of wage income deductions and credits can negate nominal income tax owed, for an effective zero or even negative (with credits) tax rate.
> The only way that I know of that you can legally enrich yourself without paying taxes…
How about tax-free bonds?
1) You make $20 from employment, and pay $5 income tax. 2) I sell you a sandwich for $15.
I still owe income tax for the money I made selling you a sandwich, even though you already paid tax.
as well as person who found it, who paid tax on that $20, who paid employer for service, who paid person who lost it
this could be non stop recursion :)
A good analogy would be if, when gambling at a casino, one had to keep track of every bet and report it and the outcome. Then, if one kept chips for over a year, you would also have to keep track of how old the chips you were betting were. Cashing out chips you held for longer than a year would have a lower tax rate. New rules now would say you have to bet with your oldest chips first. Now report all this activity to the IRS with your taxes each year. Vegas and other casinos would not exist with such rules and so much pressure would be against laws treating Vegas style gambling the same way.
This is true for all capital assets. With cryptocurrencies, the data are all public. There may be room for a service which, given a set of wallets, produces a sample tax transcript.
Disclaimer: I am neither a lawyer nor a tax expert. This is not legal nor tax advice. Talk to a CPA about your tax situation.
it actually seems like it would be pretty easy to do if the user stayed within bitcoin and did all the transactions themselves.
Seems like it would be harder/impossible if they used a broker with a common wallet, which is I thought how most of the brokerages worked.
That might've worked, except it doesn't delineate short and long-term gains, and even worse it counts every transfer to GDAX as a sale. That meant hours of pouring through GDAX's even more bare-bones reports to figure out which coins were sold, which were kept, which were transferred back to Coinbase or to other wallets, which coins were held for longer than a year...
That process, across several different cryptocurrencies and thousands of transactions, took 8 hours of work. At the end of it all you're left with the sinking worry that you overlooked something and are overpaying or underpaying.
- Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
- Exchanging one token for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
- Receiving payments in crypto in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
- Spending crypto is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $100. If that coin was then worth $200 and you bought a $200 gift card, there is a $100 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
- Converting a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
- Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it's sold, exchanged, etc., there will be a capital gain.
- Mining coins is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
- Initial coin offerings do not fall under the IRS's tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.
https://www.cnbc.com/2018/01/30/cryptocurrency-and-taxes-wha...
Which is absurdly difficult for the average person to account for. If I buy 60000 XRP for 4 BTC, what is my cost basis? Do I have to keep track of how much those bitcoins were worth on a different exchange with Fiat pairings at the moment I traded on a pure crypto exchange? What if I don't have that data? How is that calculation supposed to account for actual liquidation costs if I liquidate to pay my taxes?
For the BTC? The USD value at the time you bought them.
> Do I have to keep track of how much those bitcoins were worth when I traded?
Yes
> What if I don't have that data?
You can get the transaction date via the block chain or your exchanges reporting and then lookup the USD value at the time.
> How is that calculation supposed to account for actual liquidation costs if I liquidate to pay my taxes?
Liquidating to pay taxes is another taxable event. That’s the same as if you did this with equities.
What if the exchange I traded on doesn't have a USD Fiat pairing? Can I use any price from any exchange that day? Can I report $0.06/BTC for an xrp sale on 4/16, the date of the major coinbase flash crash? Does it have to be the exact price at the exact time? Can I choose the USD value of the KRW/BTC market on Bithumb?
You should report your taxes as honestly as possible, using reasonable prices for things.
You should use the fair market value.
I want to pay my taxes. I believe crypto should be taxed. But when you get into the situation where well meaning people have to take guesses at what is appropriate, and differences between seemingly simple rules of thumb can result in 20+% disparities in taxes owed, you're gonna have a bad time no matter how diligent you are.
Neither is easy to value, but the rules for doing so are well-defined.
The only thing that's new about this is that the average person can more easily get themselves into a difficult tax situation than before these tokens existed. That's in turn because of the SEC accredited investor rules and other countries' equivalents, which make these tough securities rarely accessible to ordinary folks without financial & tax sophistication. The accredited investor definitions have a lot of flaws, but not the idea behind having such a barrier.
And, indeed, the SEC and foreign equivalents are starting to pay more and more attention to cryptocurrency... The rules are still the rules, as much as people don't like it.
Can’t be a very good trader, that is for true...
> report their cryptocurrency earnings
At some point, stellar converted lumens to stellar. Anyone know if that would be considered a taxable event? Did that change my basis?
You're citing existing precedents/case law that has been decided. The cryptocurrency cases have not yet been adjudicated by the tax court, so as an individual filer, I would be comfortable taking any reasonably justifiable position and defending it in audit if needed.
I would put more weight on the possibility of considering it a 1031 like-kind exchange, than a tax free merger/reorganization . Although I don't have a lot of exposure to the 1031 rules to know if there's a clear objection there.
Holy crap do we need reform.
It seems perfectly reasonable to me that income is income regardless of whether it is dollars or magic beans and that gains on investments are taxed largely without regard for the form of the investment.
[1]: if we're pragmatic about it, cryptocoins can't be used for much on their own
1. Wash sale rules (where buying a substantially identical security within 30 days before or after a sale-for-a-loss disallows the loss)
2. Section 1031 exchanges
The only reform I see needed is that exchanges could help facilitate reporting these transactions.
* A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
* Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue Form 1099-MISC.
* Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
* Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
But I think this last one is probably the most interesting to us HODLers
* The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
https://www.irs.gov/pub/irs-pdf/i4684.pdf
If you recover the property in the future after filing it as lost, pay a tax professional to advise you.
There are certain criteria that are required for something to be treated as a split and IIRC coin forks were really iffy in this case. The usual case in a stock split is that you get either more of the same security or something of similar likeness (a non voting class of shares in the case of the google split), which is arguable in the case of crypto.
You could argue it’s a split to save money and if you had a huge amount in BTC at the time of the split it’d be worthwhile. My tax savings were going to end up being trivial so I went with what was “safe”.
Edit: noticed your comment about Apple stock “moon”-big. If we’re reporting the fork as income then it’d be income at the value at the time of the fork. So if you had one BTC then the BCH income would be $277 or so and that would become the cost basis going forward. I didn’t have a lot of BTC so the actual tax cost was very low. If you’re holding thousands of BTC at the time then the story would be different and you’d be incentivized to argue a different tax treatment.
Apologies for the wordiness here!!
https://www.investopedia.com/ask/answers/052115/why-are-some...
if you dont bother to define the rules of the game then you're just pretty much barefacedly just abusing your legal power to tax whatever you want to tax for the sake of taxing.
Companies like blockseer.com are being used by regulatory folks to find people skirting the rules.
What I'm getting out of it all is, people who did not make money on cryptocurrencies this past year are getting some satisfaction from the difficulties of those that did.
"A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property." https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report...
It sort of kills the use of cryptocurrency as "currency" in the US. Imagine if in the end of the year we had to report every dollar transaction (e.g. buying a coffee and a bagel), trace how you earned that dollar and calculate capital gains/loss.
Do you account typically report FIFO or LIFO?
You can register a capital loss of $100 if you account last-in-first-out, but will be on the hook when you sell your $10 gravel on the future at any price higher than $10.
You’d register a capital gain of $90 over cost if you account first-in-first-out.
AFAIK, in either case you have to account for all of your transactions the same way, for the year in question. It’s not pick and chose to gain the best benefit.
Tax rate in either case would be calculated based on how long you held your gravel.
Edit: easiest thing to do as a workaround, imo, would be to build tax reporting into wallet software.
As for solving the problem with software, it’s already “solved” by your broker. In the investing world when you sell you choose which lots you want to sell. You typically tell your broker what sort of strategy you want to use (LIFO vs FIFO) and they handle it for you. So I’d expect a software solution to work the same way - you would configure the software to LIFO/FIFO/other.
Because nobody was using cryptocurrency as a currency in the first place--it is far to volatile to behave as a functioning currency. It is all being used for speculation.
But America likes its tax system to be super complicated and complex.
If you later sold it for more, you owe tax on the gains.
then when you sell the btc for usd, you pay the capital gains tax (probably 15%, it depends) on the difference from the price it was accepted at, and the price it was sold at
How do they intend to record this?
Same applies for crypto gains, if you avoid using US based crypto-exchanges you are probably OK for the foreseeable future.
I have found that many americans overestimate the reach, competence, and sheer willpower of the IRS.
You would be surprised at what /doesn't/ happen if you stop filing taxes.
You are right: the sun would still rise everything morning, life would continue pretty much unchanged, no one would break down the door to haul you away for not filing your return. This is not Hollywood. But a little envelope could show up in a year, two years -- or twenty years. If you do not file there is no time limit on collection of taxes, interest and penalties. https://www.irs.gov/irm/part5/irm_05-001-019 Maybe you are living in a van now and getting cash on the nail and can't care less. But... what if you clean up in ten years and want to live better? Even a zero return is better than no return.
And if you do not live in a van but have an actual income with a paper trail, the IRS might just file a Substitution for Return on your behalf and then, if you do not respond, they will, with the full force of the law, come after what they think you owe them, putting a federal tax lien on your real property, garnishing your wages and so on.
Once you or they filed a return, there's a ten year time limit on collecting the money, but, again, that doesn't apply if you do not file.
What really doesn't happen is criminal tax evasion charges. That's truly rare and reserved for the heavy hitters.
It's that if they do catch you you are signing up for lots of fines and or imprisonment by not previously declaring.
"K, enjoy prison. And the fines. And interest."
> How do they intend to record this?
Coinbase shares data with the IRS. I imagine Kraken will also, as they are US-based. Maybe you've used a foreign exchange that isn't obliged to share this data with the USG, though if you've received large fiat sums to your bank account you may have raised some AML flags already...
This isn’t different than any other form of undeclared income.
https://www.mdmfinancialservices.com/cryptocurrency-and-like...
Declare your income, or don’t.