Accounting On Us
Cryptocurrency taxes reporting
How to get ready to file your return
Austin Bradley, CPA
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. That’s why the American Institute of Certified Public Accountants (AICPA) recently asked the IRS for further guidance on the implications of numerous cryptocurrency tax items. Maybe you’ve considered diving into the world of cryptocurrency investing, or maybe you were an early adopter (in which case, you likely have some large gains to report!) Either way, let’s hit a few of the highlights so you’ll have a general base of knowledge come tax time.
Mining cryptocurrency is expensive. Very 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. However, as of this writing, mining has not been banned in Arizona, California, or China, and the number of U.S cities that have banned mining can be counted on one hand.
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, at this point, there has been no official guidance issued.
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. Overstock.com, for example, accepts multiple cryptocurrencies as payment, including Bitcoin, Ethereum, Litecoin and Dash. Several other household names currently accept Bitcoin – Expedia, Newegg and Microsoft. Could Amazon be around the corner? That would go a long way towards bringing cryptocurrency even further into the mainstream public eye.
The IRS has already stated that transactions conducted via cryptocurrency are considered revenue to the recipient of the currency and a 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 dollar or two?
The AICPA suggests a de minimis rule allowing taxpayers to exclude transactions resulting in gains of less than $200. We’ll have to wait and see what the IRS thinks about this.
How 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 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. 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 to have full guidance on the reporting issues facing cryptocurrency transactions. Another major consideration is the potential for cryptocurrency ownership to trigger a foreign asset reporting requirement.
You may be familiar with the reporting requirements for taxpayers with ownership of bank accounts in foreign countries. Currently, the IRS and FinCEN have not explicitly stated whether cryptocurrency is subject to the same FBAR reporting (Report of Foreign Bank and Financial Accounts) that bank accounts are. Several questions would need to be answered – first, is cryptocurrency subject to these reporting requirements at all? If so, would all cryptocurrency be subject, or only coins held on exchanges that are based in foreign countries? Many holders of cryptocurrency keep their coins in a “cold wallet,” meaning they are completely offline and safe from attacks by hackers on exchanges. There is a definite separation between holding coins on an exchange versus in a wallet, but whether FinCEN would recognize that difference remains to be seen.
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 is not going away either, so the IRS would do well to address these issues sooner rather than later.
If you own cryptocurrency and need help with the tax implications for your situation, be sure to contact your Henry+Horne tax advisor.