Tax implications for crypto

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joefro
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Tax implications for crypto

Postby joefro » Sat Dec 16, 2017

With many people, including myself, dabbling in the cryptosphere for the first year... I have built up some tax-related questions I need to do research into. Problem is, this is all so new I am not even sure if the answers are out there yet.

A lot of folks do a lot of limit trading on GDAX making money on the swings. Are you going to have to manually go and calculate every buy and sell price to determine how much profit was made and therefore how much tax is due? What about when you buy a bunch and only sell half, and then convert the other half into other alt-coins on Bittrex, and then sell those later? I know the answer is that it's probably the same as for stocks, but I use turbotax and it automatically imports the data from my brokerage and determines my tax for me. Also, you can't just convert one stock directly into another stock without selling it for cash first so not sure how that works.

My other question has to do with mining. Typically when you buy and sell a stock, you calculate the difference in the date it was bought and the date it was sold. How do you calculate the initial value of something that you mined continuously over a period of time where the value of the coin was constantly changing? If you hold something for a year, the taxes are lower than for short term capital gains, but if you are getting tiny amounts continuously for over a year how do you determine how long you've held the asset?

I'm sure these are all questions for a professional CPA, but honestly the majority of CPAs might not even know how to handle crypto yet. Anyone put any thought into these questions yet?

silverhead
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Re: Tax implications for crypto

Postby silverhead » Sat Dec 16, 2017

I bet that the majority of CPAs are like me and don't even know what a crypto is :shock:
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MaxGravy
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Re: Tax implications for crypto

Postby MaxGravy » Sat Dec 16, 2017

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edit: that first one was a bit too much. :oops:
I'm clearly not very bright.

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BotanicusRex
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Re: Tax implications for crypto

Postby BotanicusRex » Sat Dec 16, 2017

Uh oh... someone wants to talk about the elephant in the room.

All those huge CGs waiting to be realized.. but bitcoins are anonymous, right?
You can't pay the IRS in bitcoins so it's evidently not a currency.. so it must be an investment.. so the clearing houses must have a record for the IRS, no?
So I guess everyone is on their honor to pay their fair share of taxes.. yeah, that must be it. :?
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fredzoyt
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Re: Tax implications for crypto

Postby fredzoyt » Sat Dec 16, 2017

joefro wrote:... but honestly the majority of CPAs might not even know how to handle crypto yet.


This! It'll be very interesting to see how CPA's have a directive on this.
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Double3
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Re: Tax implications for crypto

Postby Double3 » Sat Dec 16, 2017

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MaxGravy
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Re: Tax implications for crypto

Postby MaxGravy » Sat Dec 16, 2017

I plan to give my accountant all bank records which include coinbase withdrawals and deposits. I can't imagine having to account for trades between cryptos done on an exchange.
I'm clearly not very bright.

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Re: Tax implications for crypto

Postby natsb88 » Sat Dec 16, 2017

IRS guidance on crypto: http://www.irs.gov/pub/irs-drop/n-14-21.pdf

Q-1: How is virtual currency treated for federal tax purposes?
A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Q-2: Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?
A-2: No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.

Q-3: Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?
A-3: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.

Q-4: What is the basis of virtual currency received as payment for goods or services in Q&A-3?
A-4: The basis of virtual currency that a taxpayer receives as payment for goods or services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. See Publication 551, Basis of Assets, for more information on the computation of basis when property is received for goods or services.

Q-5: How is the fair market value of virtual currency determined?
A-5: For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.

Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?
A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.

Q-7: What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?
A-7: The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See Publication 544 for
more information about capital assets and the character of gain or loss.

Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?
A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.

Q-9: Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?
A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute selfemployment income and are subject to the self-employment tax. See Chapter 10 of Publication 334, Tax Guide for Small Business, for more information on selfemployment tax and Publication 535, Business Expenses, for more information on determining whether expenses are from a business activity carried on to make a profit.

Q-10: Does virtual currency received by an independent contractor for performing services constitute self-employment income?
A-10: Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of
receipt, constitutes self-employment income and is subject to the self-employment tax. See FS-2007-18, April 2007, Business or Hobby? Answer Has Implications for Deductions, for information on determining whether an activity is a business or a hobby.

Q-11: Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?
A-11: Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. See Publication 15 (Circular E), Employer’s Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes.

Q-12: Is a payment made using virtual currency subject to information reporting?
A-12: A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.

Q-13: Is a person who in the course of a trade or business makes a payment using virtual currency worth $600 or more to an independent contractor for performing services required to file an information return with the IRS?
A-13: Generally, a person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. Payments of virtual currency required to be reported on
Form 1099-MISC should be reported using the fair market value of the virtual currency in U.S. dollars as of the date of payment. The payment recipient may have income even if the recipient does not receive a Form 1099-MISC. See the Instructions to Form 1099-MISC and the General Instructions for Certain Information Returns for more information. For payments to non-U.S. persons, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Q-14: Are payments made using virtual currency subject to backup withholding?
A-14: Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required. See Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, for more information.

Q-15: Are there IRS information reporting requirements for a person who settles payments made in virtual currency on behalf of merchants that accept virtual currency from their customers?
A-15: Yes, if certain requirements are met. In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and 5a-1 on the Form 1099-K, transactions where the TPSO settles payments made with
virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment. See The Third Party Information Reporting Center, http://www.irs.gov/Tax-
Professionals/Third-Party-Reporting-Information-Center, for more information on
reporting transactions on Form 1099-K.

Q-16: Will taxpayers be subject to penalties for having treated a virtual currency transaction in a manner that is inconsistent with this notice prior to March 25, 2014?
A-16: Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722. However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.

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Re: Tax implications for crypto

Postby shinnosuke » Sat Dec 16, 2017

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Gus Chiggins
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Re: Tax implications for crypto

Postby Gus Chiggins » Sat Dec 16, 2017

:lol: :lol: :lol:

Good luck collecting on everyone, Mr. G-man!
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cmiller17363
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Re: Tax implications for crypto

Postby cmiller17363 » Sat Dec 16, 2017

I was going to ask if "Let the IRS tell you what you owe" was an appropriate response. :grinch: :lol:
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Long John
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Re: Tax implications for crypto

Postby Long John » Sun Dec 17, 2017

Totting up every trade would be a nightmare for some people. My simple idea is if I put $10 into crypto and leave it there, there is nothing to tax (beyond normal income tax). The fact that the crypto is now worth $15 will matter only if I cash it out: then I have a $5 capital gain. Since I've done just a smidgen *cough* of cashing out, I'll see what 1099 or other reportable information, if any, Coinbase/GDAX gives me and consult with a professional. I'll consult with a professional anyway, because I may be talking out of my a$$.

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300Braveheart
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Re: Tax implications for crypto

Postby 300Braveheart » Sun Dec 17, 2017

Yep, gotta thank the government for all the help and emotional support they showed to get into cryptos. How would we be able to maintain a crypto wallet in a decentralized currency online from anywhere in the world without the roads and bridges?
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Re: Tax implications for crypto

Postby jcz1 » Sun Dec 17, 2017

Those who don't get 1099's, take note of the IRS victory over Coinbase last month. In that case, they got info on anyone who "bought, sold, sent, or received more than $20,000 through their accounts in a single year between 2013 and 2015."

https://www.theverge.com/2017/11/29/167 ... rs-records

Even though the agreement now seems to be 200 transactions AND $20k, are you SURE that the IRS won't go back and get the ones with just the $20k? If they ever do and you didn't report it, they will likely impose penalties.

With the massive rise in USD value this year, I'm sure the IRS is expecting a lot of gains to show up on tax forms.

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Long John
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Re: Tax implications for crypto

Postby Long John » Sun Dec 17, 2017

Are any of our BS members known to be a tax professional, whom we could wheedle for free advice? :lol:

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SilverDoge
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Re: Tax implications for crypto

Postby SilverDoge » Sun Dec 17, 2017

jcz1 wrote:With the massive rise in USD value this year, I'm sure the IRS is expecting a lot of gains to show up on tax forms.


You are assuming everyone is selling. Vast majority of bitcoin holders are precisely that: holders. The IRS can "expect" whatever they want. Reality might differ.
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joefro
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Re: Tax implications for crypto

Postby joefro » Sun Dec 17, 2017

Thanks for the info Nate. Of course if anyone is all the ball, it will be the IRS. :lol:

jcz1
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Re: Tax implications for crypto

Postby jcz1 » Sun Dec 17, 2017

SilverDoge wrote:
jcz1 wrote:With the massive rise in USD value this year, I'm sure the IRS is expecting a lot of gains to show up on tax forms.


You are assuming everyone is selling. Vast majority of bitcoin holders are precisely that: holders. The IRS can "expect" whatever they want. Reality might differ.


Isn't it true that you can see transactions scroll by on at least one of the exchanges? The IRS can see that too.

And guess what? Every transaction involves a seller. :roll:

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SilverDoge
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Re: Tax implications for crypto

Postby SilverDoge » Sun Dec 17, 2017

jcz1 wrote:
SilverDoge wrote:
jcz1 wrote:With the massive rise in USD value this year, I'm sure the IRS is expecting a lot of gains to show up on tax forms.


You are assuming everyone is selling. Vast majority of bitcoin holders are precisely that: holders. The IRS can "expect" whatever they want. Reality might differ.


Isn't it true that you can see transactions scroll by on at least one of the exchanges? The IRS can see that too.

And guess what? Every transaction involves a seller. :roll:


I heard the IRS is accepting applications. You'd likely do really well over there. :kitty:
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Long John
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Re: Tax implications for crypto

Postby Long John » Sun Dec 17, 2017

jcz1 wrote:Isn't it true that you can see transactions scroll by on at least one of the exchanges? The IRS can see that too. And guess what? Every transaction involves a seller. :roll:

Yes, orders scroll, at the speed of light sometimes. But there's no buyer or seller information, just the price. At least on the exchanges I've traded on.


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