Snagged this from another site. Anybody have any tax issues? Advice... Thoughts? Soundoff Crypto Ballers!
BITCOIN TAX
Bitcoin is a peer-to-peer (P2P) electronic cash that allows worldwide money transfers without the need for intermediaries/third-party. The Bitcoin network is basically maintained by a combination of cryptography and computer science (e.g. Blockchain technology) and unlike a fiat currency, Bitcoin does not have a central authority and is not issued nor backed by any central bank. Instead, new Bitcoins are generated by the so-called Mining process. Despite being a cryptocurrency, Bitcoin presents a unique set of features and may be used as both a store of value (property) and virtual currency – for investment or trading purposes. This article addresses the US tax code and its implications on Bitcoin and Cryptocurrencies. According to the Notice 2014-21 published by the US Internal Revenue Service (IRS), “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value […]. Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency.” However, as cryptocurrencies are not issued by a central bank, the IRS decided to treat Bitcoin as property rather than currency when it comes to taxation. [1] Whether you are a consumer, merchant, mine, or service provider, the IRS perceives Bitcoin users and holders as investors. [2] The IRS has made it mandatory to report any kind of Bitcoin transaction, no matter how small in value. A payment made using Bitcoin is subject to information reporting to the same
extent any other payment made is in property. Using Bitcoin for long-term investing or shortterm usage (such as buying goods or services) will be subject to capital gains tax. Capital gains tax arises when you sell a capital asset (e.g. Bitcoin, stock, bond, real estate) for more than its purchase price. It can be subdivided into short-term (sold within one year of purchase) and long-term (when the asset is held for more than one year before being sold). Therefore, the US jurisdiction presents a different rate of capital gains taxation for short-term and long-term capital gains (based on the length of time the asset was held). The accrued longterm gains are taxed at the taxpayer’s applicable capital gains tax rate (from 0% to 23.8%) according to the individual’s personal income and tax bracket. The short-term gains are taxed at the same rate as the ordinary income taxes (from 10% to 37%). Considering the complexity of US tax code, traders/investors are recommended to consult with a qualified tax professional about their specific situation. Since Bitcoin is considered by the IRS as a property and not a currency, it is much more difficult to write off the capital losses. Capital losses are the opposite of capital gains and “are reportable as deductions on the investor’s tax return, just as capital gains must be reported as income.” [3] The IRS caps capital loss deductions at $3,000 per year. If a loss exceeds that of $3,000 in one year, the short-term losses may be carried over to the following tax years until the amount of the loss is exhausted. The capital losses may be used to offset gains and reduce taxable income. In summation, if you sell your Bitcoins for profit, these profits are taxed. If you sell your Bitcoins at a loss, these losses may be used to deduct and reduce your taxes (capped at $3,000 annually). Spending Bitcoins to buy goods or services is equivalent to selling your coins and is also taxed as capital gains/losses. Until now, only trades between fiat and crypto were taxed, with traders and investors paying taxes only when they “cashed out” or spent their coins. However, a new tax code, recently signed into law by United States president Donald Trump, will make all cryptocurrency trades a taxable event. The new code will take effect on the first day of 2018. In order to have an accurate measurement of your crypto-income, it is important to keep your trading records. Third-party exchanges and hosted wallet services usually allow users to download their Trade History, making it easier to track their transactions and to determine their cost basis – the original value of an asset for tax purposes (usually the purchase price plus fees). In other words, the cost basis is the value of an asset at the moment you receive or buy it. When an asset is sold, the cost basis is used to determine your profit or loss, which in turn affects the amount of tax you owe.
The IRS requires that taxpayers report their capital gains/losses based on their cost basis, which is usually the fair market value (FMV) for the date they received or bought their Bitcoins/assets (and also for the day they sell them). The FMV is the price that a buyer and seller are willing to exchange an asset (basically the current average market price). Let’s suppose Alice bought some Bitcoins for $500 each in 2016 and then sold these coins to Bob in 2017 for $1,000 each. Alice’s cost basis was $500 for each BTC (roughly the fair market value at the moment she bought in 2016). On the other hand, Bob’s cost basis was $1,000 for each coin. In theory, the fair market value reported by Alice when selling her Bitcoins should be equivalent to Bob’s reported cost basis at the moment he bought them from Alice. Moreover, mined cryptocurrencies are recognized income and taxed according to their fair market value at the exact moment they were mined. Mining equipment investments can be deducted as legitimate business expenses. DONATIONS AND GIFTS
When Bitcoins are used for charitable donations there are three potential scenarios regarding the taxes. The first and most common scenario happens when a Bitcoin user wants to make a donation to a 501(c) charity that has the IRS approval to collect tax-exempt donations but does not have the proper set up to accept donations via Bitcoin. In this case, the donor would be first required to sell some of his Bitcoins and cash out the money in order to donate. Therefore, his sales would be liable to capital gain taxes just as any other asset sale. However, the subsequent donation would still be tax-exempt and could be used to reduce his ordinary income taxes.
The second possible scenario takes place when the charity accepts donations via Bitcoin transfers and the investor is able to directly donate without the need to convert his coins into fiat. In this case both the recipient charity and the donor would have to file the IRS tax form 8283, which is used for noncash donations (i.e. property, vehicles, collectible art, Bitcoin). The US “IRS allows donors to write off the entire fair market value of donated property which has been held for over a year (up to 30% of adjusted gross income) without stipulating a capital-gains tax.” [4] Therefore, this scenario is more beneficial for donations that were originated from longterm Bitcoin holdings. The third possible scenario happens when the charity institution does not have the IRS 501(c) approval to collect tax-exempt donations. In this case, the organization would be liable to capital gains taxes just as Bitcoin investors and would be required to maintain a record of every donation received. If the charity institution posteriorly gets the IRS 501(c) approval, the first scenario would take place. When it comes to gift taxes, taxpayers are usually exempt from paying taxes as long as the total value of the gift does not exceed $15,000 per year, per person. It is the giver of the gift who is required to pay the gift taxes. According to the IRS FAQ on Gift Taxes, “the general rule is that any gift is a taxable gift”, but there are some exceptions to this rule: 1. There are no limitations on gifts to spouses 2. Political organizations, charities. 3. Anyone that receives medical expenses or tuition gifts. Although gift recipients are usually exempt from gift taxes, this may not always be the case when it comes to cryptocurrencies. Any gift of property that realizes capital gains or losses is subject to taxes according to the property’s cost basis at the moment it was bought. So if Alice donates 1 Bitcoin to Bob, the holding period and cost basis are inherited and do not change. If Alice paid $600 for the coin in 2016 and then donate it to Bob in 2017, Bob would still have the same cost basis of $600. If he sells the Bitcoin for $1000, his $400 capital gain would be subject to taxes. Similarly, if Bob sells the Bitcoin at a loss, he can use it to reduce the taxable income.
LOSS OF FUNDS
If your Bitcoins get stolen or lost, you may deduct your losses under the Section 165 of the Internal Revenue Code, which covers casualty and theft losses. However, the value lost would not be the current market value of your Bitcoin, but the amount for which you bought it. Moreover, there is a limitation that requires you to decrease your deduction in $100 plus 10% of your adjusted gross income (AGI). So if Alice buys 1 Bitcoin for $7,000 that gets lost or stolen, she cannot deduct her loss if her AGI is $69,000 or higher. If Alice’s AGI is $50,000, she can deduct a loss of $1,900 ($7,000 - $100 - $5,000). Each specific case may have different tax implications depending on the circumstances of your loss. Therefore, it is recommended that you seek for professional tax consultancy in this instances.
FINAL CONSIDERATIONS Despite being a burden for most Cryptocurrency investors, accurately recording and reporting Bitcoin income is a crucial aspect of the digital currency economy. When it comes to Bitcoin and Cryptocurrencies taxation, each country has a different set of regulations and there is still a great need for clearer instructions. Be sure to look into the tax code and laws of your own country to find specific details. Considering that the US tax code is extremely complex, it is recommended that investors and traders consult with qualified and experienced professionals (e.g. accountants, tax attorneys) in order to ensure that your tax filings are done in the right way. Regarding Bitcoin, there are several services designed to help users, such as CoinReporting and Bitcoin Taxes.
● Bitcoin is a personal property, not a currency, and so is taxed as a capital asset; ● Gains made from converting Bitcoins into a fiat currency are subject to capital gains tax; ● Purchases of goods or services with Bitcoins are also subject to capital gains tax; ● The capital gains tax rate is different for short-term (higher) and long-term (lower) investments; ● The IRS limits capital loss deductions at $3,000 per year; ● Beginning January 1st, 2018, all cryptocurrency trades will be taxable events. ● Mined cryptocurrencies are recognized income and taxed according to the fair market value at the exact moment they were mined; ● Mining equipment investments can be deducted as legitimate business expenses; ● Bitcoin donations are taxed according to the circumstances; ● Gifted Bitcoins inherit their holding period and cost bases. ● Any gift of property that realizes capital gains/losses is subject to taxes based on the cost basis at the moment it was first bought/acquired; ● Stolen or lost funds may be deducted under the Section 165 of the Internal Revenue Code.
$120? I'm SO tempted to buy.
