If trying to wrap your head around blockchain technology wasn’t difficult enough, the tax implications of cryptocurrency trading, investing, mining and bartering are no picnic to figure out either. The IRS issued Notice 2014-21 on April 14, 2014, addressing a number of frequently asked questions regarding cryptocurrency taxation. A lot has happened in the four years since, however, and the original notice did not fully address all issues to begin with. For this reason, the AICPA recently submitted a letter to the IRS requesting further guidance on various cryptocurrency tax items. If you’re feeling ambitious you can read the letter in its entirety here. For the rest of us, I’ll hit a few of the highlights.
Mining cryptocurrency is expensive. Like, really expensive. Sure, the computer equipment isn’t cheap, but the utility costs are the real burden. In fact, Bitcoin mining consumes so much electricity that several U.S. cities have banned it altogether, and China has discussed banning it across the entire country. The IRS has already stated that mined cryptocurrency is ordinary income to the miner, recognized at fair market value at the time the equation is solved and the token of currency created. But when can these costs of mining be deducted? It seems reasonable to presume that mining costs would be deductible as incurred, rather than capitalized into the basis of the asset, but there is no official guidance yet.
Is it actual currency?
Up to this point in the cryptocurrency timeline, tokens have been primarily used as a store of value or an alternative investment vehicle, rather than an actual currency. However, there are businesses that accept cryptocurrency for payment of goods and services. The IRS has already stated that this is considered revenue to the recipient of the currency, and is capital gain or loss to the payor of currency, depending on their basis in the tokens and the fair market value of the goods or services received. But what about a transaction as insignificant as a cup of coffee? Do taxpayers really need to track and report their capital gain or loss resulting from a transaction totaling a buck fifty? The AICPA suggests a de minimis rule allowing taxpayers to exclude transactions resulting in gain of less than $200. We’ll have to wait and see what the IRS thinks about this.
Lastly, what about the tax treatment of blockchain oddities such as forks and chain-splits, which can result in the creation of a new sub-currency? For example, in August of 2017 Bitcoin experienced a hard-fork which resulted in the creation of Bitcoin Cash, a completely new cryptocurrency. Holders of Bitcoin at the time of the fork each received a unit of Bitcoin Cash for every unit of Bitcoin that they held. To keep it simple, this can be likened to a 1:1 stock split. Guidance as far as the tax implications of this event do not yet exist, however. Is the value of the new coin income to the recipient? If so, is it capital gain or ordinary? What is the taxpayer’s basis in the new coin?
More guidance needed
These are only a few of the items that need to be addressed in order to have full guidance on the reporting issues facing cryptocurrency transactions. Other major considerations include like-kind treatment of coin swaps, potential foreign asset reporting requirements for coins held in exchanges based outside of the U.S. and the holding of cryptocurrencies in retirement accounts.
Virtual currencies are only becoming more mainstream and accessible; major financial broadcasts and publications have regular segments dedicated to it. The uncertainty regarding tax implications are not going away either, so the IRS would do well to address these issues sooner rather than later.
Austin Bradley, CPA