Are you a part of the Cryptocurrency frenzy? Have you been lucky enough to ride the wave to a huge gain? Guess who else wants to know? The Internal Revenue Service.
After much consternation, the world of cryptocurrency has been deemed by the IRS not as a currency, but as property. Well, not always, but for the most part, Bitcoin and other cryptocurrencies like it, are looked at by the IRS as investments, taxed just as stocks would. Hold it for less than a year, short term capital gains and thus ordinary income rates. Hold it for longer than 12 months and gains are taxed at more beneficial long-term capital gains rates.
Since the appreciation of Bitcoin and similar cryptocurrencies is a relatively new phenomenon, the IRS has not entirely kept up to pace. “But times are a changing”. With huge swings in the market and potential tax liabilities looming, the IRS has begun to take a much closer look at those holding cryptocurrencies.
So how do you the owner, user, investor of cryptocurrency move forward? Here are some answers to some often asked questions.
I sold cryptocurrency in 2017. Is this taxable? IF so, how is it treated?
Think “other stock investments”. If you held the currency for more than 12 months, you qualify for long-term capital gains, 12 months or less, taxes are calculated at ordinary gains rates. Losses can be used to offset other capital gains or up to $3000 of other kinds of income. Like other capital loss transactions, losses can be carried over to future tax years.
I got paid (or paid employees) in cryptocurrency. Is this different tax treatment than cash?
No, receiving compensation in cryptocurrency is no different than being paid in dollars. The employer will include on the W-2 the cash value of the payment at the time of employment. The compensation will be subject to all the Federal and state taxes and withholding of a cash payment.
Similarly, a 1099 would be issued to consultants by the vendor for the cash value of service provided.
I used cryptocurrency to pay for something. Is this a taxable event?
Yes, it can be.
If you purchased cryptocurrency at a rate lower than what it was trading at when you used it for a purchase, the difference between the acquisition price and the price when it was used is taxed as capital gains.
For example, if you purchased Bitcoin a few years back for $1500 and then used that same Bitcoin to purchase service when the value of the Bitcoin was $11,500, you would have a $10,000 gain to deal with.
Again, the length of time you held the cryptocurrency determines whether it is long term or short-term treatment. But unless the price you paid to acquire the cryptocurrency and the price the currency was trading at when you used it are the same, you will have either a gain or loss on the cryptocurrency transaction to deal with.
Will my broker keep track of my cryptocurrency transactions?
Currently the IRS does not require exchanges or brokers to report your activity. While you may have grown used to your capital gain activity being recorded on a 1099-B, no such form is currently being provided.
This does not, however, mean that you can be lax about your cryptocurrency transactions. Quite the opposite. You will be the sole keeper of such information, at least in the current climate.
Can I donate Cryptocurrency to a charity?
Just like stock, or any other appreciating investments, if the charity is open to receiving it, yes, you can donate it. And if you still itemized, you can take the deduction.
I thought I had my cryptocurrency tax liability figured out. Will the new tax law have any affect on cryptocurrency transaction treatment?
Without much by way of IRS regulations under the previous law, other than a few esoteric uses related to changes in the treatment certain real estate transactions, there are no direct changes to the way the IRS will treat cryptocurrency transaction under the new law.
Are there IRS risk areas and reporting requirement if my Cryptocurrency holdings are overseas?
Absolutely! There are numerous US tax reporting requirements on Cryptocurrency holdings that US taxpayers must be aware of, especially when those holdings are held in foreign accounts.
FOREIGN FINANCIAL ACCOUNTS REPORTING (FBAR)
FinCEN Form 114: A US resident that has a financial interest in or signature authority over foreign financial accounts must file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The type of vary widely and include the basic accounts we are all accustomed to; savings and checking accounts, CDs, etc. What many people don’t think about is Cryptocurrency accounts, which are often held in less standard settings. For example, do you have a cryptocurrency based online poker account? If so, this account may be held overseas and thus may require FBAR rules and filings.
More simply, a US taxpayer’s cryptocurrency account in excess of $10,000, held by a foreign bank account or within a foreign virtual currency exchange, that provides financial services similar to banks and financial institutions in exchange for fees would be reportable as a foreign financial account and thus FBAR reportable on FinCEN Form 114. Penalties for not filing this form can range from $10,000 to $100,000 or greater.
FOREIGN ACCOUNT TAX COMPLIANCE (FACTA)
Form 8938: Foreign Account Tax Compliance (FACTA) has imposed numerous reporting requirement on US taxpayers since 2010. Foreign assets that fall under the FACTA requirements include accounts with any non-US Financial Institution (FFI). Cryptocurrency held in foreign bank accounts or in foreign cryptocurrency exchanges may be considered FFIs. US Tax payers with accounts of this type and with a value exceeding $50,000 must reports such accounts on Form 8938. With the rapid rise in cryptocurrency value, a 12/31/17 valuation of such accounts is suggested.
If you have additional questions or would like assistance with tax projections regarding your cryptocurrency, or any other related tax issues, please contact at Taxquery@nbaccorp.com or call any of our offices in MD or VA
Rockville, MD, 451 Hungerford Dr, Rockville, MD 20850 (301) 977-0090
Fairfax, VA, 11350 Random Hills Rd #260, Fairfax, VA 22030 (703) 691-2490
Falls Church, VA, 450 N Washington St Suite H, Falls Church, VA 22046 (703) 845-5900
President, iVenture Accounting Group