Taxes on Cryptocurrency

Taxes on Cryptocurrency

Today I want to talk to you about Cryptocurrencies. Up until now, the effects on your tax liability and the taxation of cryptocurrencies has been a little convoluted. It is also important to mention that the IRS released data this year that said, in 2017 the IRS only received a few hundred tax returns in which people actually reported cryptocurrency transactions as a capital gain, or a loss, or as ordinary income. However, we know that the number of people transacting in these currencies is much higher. The IRS knows it too and they have come out and said, 2018 is going to be a landmark year for enforcement and I to believe them on this.

Video Transcript - Taxes on Cryptocurrency

It's time to get down to the brass tacks. My name is Mel Sams and I'm the managing associate of Sams CPA. And today I want to talk to about cryptocurrencies and their affects on your tax liability, and the taxation of cryptocurrencies, which up until now has been a little convoluted.

I would start this out by saying the IRS released some data to us this year that said that in 2017 they only received, and get this, they only received a few hundred tax returns in which people actually reported cryptocurrency transactions as a capital gain or loss or as ordinary income. We know that the number of people transacting in these currencies are much, much higher as a matter of fact, we accept it as a form of payment even, so I know that a lot of people are using these coins throughout their daily lives and the IRS knows it too, and they've come out and they've said the 2018 is going to be a landmark year for enforcement. And I tend to believe them on this because crypto currency, and it's misleading, it's called crypto currency. But it surely not a currency. It's a means of transferring and storing wealth using digital technologies.

But nonetheless, the IRS knows that people are transacting it, and because of the anonymity and because of the difficulty and tracing it and because of the lack of reporting in that industry, the IRS is going to come down hard on cryptocurrency and its owners and users. As a matter of fact, you may know earlier this year, IRS subpoenaed the records of Coinbase, probably the most predominant digital retailer of crypto on the Internet, on apps, they subpoenaed their records, so IRS got the records of all the people that have transacted in coins on Coinbase. Potentially they could match that up to your income tax return and see if you reported the coins that you exchanged or cashed out or whatever. They could do that.

Now the IRS has also told us that potentially if you don't report these transactions, you could be looking at an up to $250000 fine. That's 2-5-0-0-0-0, $250000 fine for not reporting these transactions. Because again, the IRS knows that large volumes of wealth are being transferred and being utilized and people are avoiding taxation. Now let me touch on how coins are treated for tax purposes, how those get taxed. And we're not just talking bitcoin, we're talking the roughly 1500 different types of cryptocurrency there are out. Any of these coins, whether it's you know, bitcoin, whether it's the All Coins, any of it, tax treatment is the same. If you exchange one coin for another, that's a taxable event. There could be a capital gain or a capital loss on that transaction and you're supposed to report it on your Schedule D, which is the form where you report the sale of property.

IRS treats this as property even though again, it's called a currency and it takes some characteristics of currency, the IRS treats it as property for tax purposes. If you're trading in foreign currency, your tax treatment is different than if you're trading then if you're trading in cryptocurrencies, potentially.

So anyway, back to the point. If you exchange coins, one coin for another, you could have a capital gain or a capital loss depending on what your cost basis was in that coin. If you, for instance, cash out, if you use Coinbase or one of the other mediums or platforms to convert your coins into cash, that's a taxable event. The gain is equal to your cost basis in the coin over what cash you got out. If you got out more cash than what your cost basis was, you have a gain. And crypto currencies are like stocks in that. If we hold them for more than one year, so 365 days plus one, we get the more favorable long term capital gain tax treatment, which is currently 15% and can escalate as your income goes up. But most coins aren't held that long. Most coins we're using to transact on short term basis.

We know that the trading coins, converting coins, cashing out coins, those are capital gain events. Now, if we receive coins in exchange for services, that's ordinary income to us. If we receive coins via mining, that's ordinary income. Airdrop, ordinary income. Your basis becomes the value of that coin at the time it's included in your income. So then later on if you transact it, like say I get paid for services in coins, my basis is equal to the fair value on the day I get them. And then if I convert them for cash or trade them for another coin down the road, that becomes capital gain transaction.

Lots of ramifications to think about when dealing with crypto. Again, not to express an opinion one way or another on when I think about them, but just to explain to you that for tax purposes, the IRS is going to be getting more serious about it. They know it's out there. They're going to be looking very hard. And Coinbase for those of you that are using Coinbase as your platform, you have your wallet with Coinbase, you could very well be receiving a 1099 from them if you transact coins over a certain amount. Much like with your credit card merchant processing, if you process more than $25000 through the merchant processor, you get a 1099, that changed about seven or eight years ago. Now Coinbase, we'll be sending you a 1099. If you're utilizing cryptocurrency in your business or in your personal investment or for any other reason, you need to be aware of the tax ramifications.

A good CPA is going to be knowledgeable. They're going to be up on the new laws. They're going to be up on the changes, and they'll be able to explain to you what your exposure may be and what to do if you've been using these coins and maybe haven't done the right reporting yet. The IRS is always more lenient if you come to them with a problem versus them coming after you with a problem, so talk to a CPA. They can help you decide what your exposure or determine what your exposure is and help you plan for how to use crypto in the future to minimize your tax liability.

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