After the recent ruling in the case with Coinbase, Bitcoin Tax has been a hot topic, and I wanted to try my hand at navigating it. This is not legal or tax advice.
Only 800-900 Americans reported any bitcoin tax related events between 2013-2015, even-though there were over 5.9 million active Coinbase users, and $6 Billion worth of Bitcoin exchanged during those years. This statistic prompted the IRS to investigate.
What happened with Coinbase:
In November 2016, the IRS issued a “John Doe” summons, requesting all of Coinbase’s user information for any person in the United States who conducted transactions in any kind of convertible virtual currency as was defined in IRS Notice 2014-21. (That notice from back in 2014 said “virtual currencies which can be converted into traditional currency are property for tax purposes.”). The Initial request from the IRS demanded a ton of documents including:
1. Complete user profiles
2. Know your customer due diligence
3. Documents regarding third-party access
4. Transaction logs
5. Records of payments processed
6. Correspondence between Coinbase and Coinbase users
7. Account or invoice statements
8. Records of payments
9. Exception records produced by Coinbase’s anti-money laundering (“AML”) system.
Coinbase fought this hard in Court for over a year, and now only 3% of its users information was turned over. If you did more than 20K in transactions, the IRS got your name.
**Take note, if they asked this of Coinbase, they are probably requesting it from all exchanges, and if Coinbase hadn’t fought with them, we never would have heard about this. It’s possible that other exchanges have already given all of this information over in order to avoid litigation.
You can read the whole order here: https://www.theverge.com/2017/11/29/16717416/us-coinbase-irs-records
How is Crypto Taxed?
Well, since only the government can create legal tender or “currency,” the IRS decided Bitcoin was property. Like all other property, if you hold it over a year, it’s a capital gain, and if you hold it less than a year, it's income. This made sense if you are using crypto as a store of value, it's the same way the stock market is taxed. If you're using Bitcoin to buy coffee however, this declaration was highly impracticable.
Here's a chart so you can figure out what your respective tax levels are.
Crypto Tax Fairness Act:
There is a new bill in the works that should really help – hopefully it’s in place before we have to file 2017 taxes. It proposes not taxing de minimis transactions under $600 USD. This is the same way the IRS currently deals with foreign currency.
Do I have to pay tax on my Alt Coins?
Yes. The way the 2014 IRS Notice defines virtual currency is not exclusive to Bitcoin. It calls all “convertible virtual currency” property. Somewhere down the line, it became common in the Bitcoin community to think that all cryptocurrency was safe from taxes until it was converted to Fiat currency (dollars). That’s what I thought too until this past weekend when I started researching it more to create this little blog. Unfortunately, the way I read the IRS Notice, it would include any coin, not just crypto as a whole. This is the same way stocks are taxed too. It would be kind of strange for the IRS to do it any other way. As far as I’m aware, there haven’t been any lawsuits on the issue to establish case law, so all we have to go from is our own interpretation of the 2014 notice.
Some people have said that moving between coins it's a like-kind transfer, (a 1031 exchange) but that's not true. Like-kind transfers are reserved for real estate, and when they are used, they are reported on an individual's tax return, they just don't realize the gain that year, and roll their old cost basis into the new property. That's not what we are doing with Alt trading.
Can I write off my Alt Coin Trading losses?
Yes, if it’s short term (realized loss in less than 12 months) there is a limit of $3,000 that you can write off for any particular trade. If your losses are more than $3,000, you can role them forward to future years.
What about mining?
Mined coins are treated as income on the day and at the price the coin is created.
LIFO or FIFO?
The IRS typically prefers FIFO (First in, First Out) - meaning the first coin you acquired is the first one that you sold. However, if you want to get fancy, there is no law against "specific identification" – which lets you choose which coin you are selling, so you could sell your most expensive coins first. This method is typically reserved for corporate accounting but there is no case law against doing this in Crypto too.
What if I sell it on another country's exchange, does this avoid American tax?
You are supposed to report foreign income that was earned from all sources, within and outside of the U.S. It is taxed at your regular income tax rate. If when you set up your account on an exchange you provided your name, email, a photo of your driver’s license, and a portion of your SSN, and if that exchange reports the information to the IRS, they can see your transaction.
I didn't keep track, now what?
You can export your transactions from most exchanges, and put it in a spreadsheet. There are also several emerging companies that will pull data from all of your exchanges and link it to turbotax. Check out bitcoin.tax or cointracker.info.
Hope this helps clear up the dreaded tax questions, if you have others feel free to post a question and I'll do my best to answer it.