Cryptocurrency for Tax Purposes
Can you believe that Tesla bought a $1.5 Billion position in bitcoin, and the company will be accepting the virtual currency as a form of payment?.
So now we know what at least one part of Elon Musk’s 2020 personal tax return will look like...as he will be checking the box “Yes” for
In 2019 this question appeared for the first time on the IRS tax return form, but on page three. Now the question is on page one and it is the first question right after your name and address. Is this a subliminal message from the IRS?
Moreover the question applies even if you just “bought” cryptocurrency and didn’t sell it, you still have to answer, “yes”, and if you answer wrongly, willfully, well, that’s perjury, my friend.
Yes, crypto may be virtual, but it is real in the eyes of the IRS and has tax implications when traded or used for transactions. It is considered as property, and is therefore subject to tax like stocks or bonds. Let’s consider.
If you buy, for example, Bitcoin at $200 and sell it for $400, then you have a $200 gain subject to tax using the capital gain rules. Regular income tax rates apply if sold short-term and preferential rates if held long-term, defined as greater than 12 months.
If you use that same $200 Bitcoin and use it to buy a pair of blue-tooth headphones, you also have a gain based on the value of the headphones. This is the type of transaction that is giving the IRS nightmares as they believe that perhaps millions of such transactions have occurred in recent years and have not been reported.
Thus, the IRS crack down on Coinbase last year, sending 10,000 letters to Coinbase customers. According to the IRS, the letter was an “educational” letter about the need to report taxable crypto transactions on a tax return. According to some of the Coinbase customers receiving that letter, it was threatening, and the IRS improperly received their personal information via a subpoena. The case is pending.
This leads to the coming attractions in 2021 where the IRS will be seeking third-party requirement reporting by brokers in 2021 for transactions in virtual currency in which they can track the sales. The IRS is tracking down any markets that are going unregulated, and virtual currency is squarely in their sight line.
Individuals or firms who receive bitcoin as payment for services or product will have the value transferred to U.S dollars and will report that equivalent value as income. If employees are paid with Bitcoin - well, it's the same thing, the fair value needs to be reported as wages and should be added to their W-2.
And it’s not only the IRS that has crypto on the radar screen. Joining the bandwagon is the Financial Crimes Enforcement Network (FinCEN). FinCEN oversees the reporting of foreign assets with the Form 114 filings required of all US persons, listing their foreign accounts when greater than $10,000 on any one day in the calendar year, in the aggregate. Starting in 2021, cryptocurrency will be added to this reporting, labeling it as a type of reportable account.
The IRS provided some guidance on the taxation of cryptocurrency last year. Among the topics and rules that they cover are for donations or gifting for the tax basis of donations or the gifting of cryptocurrency and the rules that apply to the holding periods in virtual currency as transactions were made, tax consequences for software changes that lead to the currency splitting into two, otherwise known as a hard fork, and tax return reporting. You can find more detailed information on the FAQs on the IRS website.
So Tesla is on to something with their stake in virtual currency. Cryptocurrency is possibly on its way to redefining the future of finance - and the IRS.
Sam Handwerger | 02/15/2021