Most of the news about Bitcoin and other virtual currencies has focused on the underlying value and the ups and downs of its value. A whisper in the wind about crypto currency and tax issues is about to blow away the strict focus on the ups and downs of the virtual currency marketplace.
There are lots of misconceptions about crypto and taxes, and any one of these misconceptions can cost the crypto investor a bunch of money. Seeing as how it’s my job to help people actually save money, I figured it was worth taking a closer look at the three biggest misconceptions that crypto investors have about tax treatment of their investments.
Misconception #1 – This Is A Currency
Yes, these virtual currencies meet the definition in its most basic sense: A medium of exchange for goods and services in an economy. However, when it comes to what the several nation states actually recognize as currency, crypto does not meet the necessary criteria..
Nation states issue “Fiat Currency”– currency backed by the full faith and credit of the nation state issuing the currency. Fiat currency isn’t tied to an underlying asset value, so its value in the global marketplace is based on the credit worthiness of the nation issuing the currency.
So, this sounds just like crypto , right? Almost.
What’s missing is the adoption by a nation state. Crypto is not tied to the policies and economy of a particular nation state. Instead, crypto is backed by the perceived value and trustworthiness of the exchanges on which they are traded – meaning there are no underlying assets, and no underlying full faith and credit of a nation state.
Misconception #2 – Crypto Currency Transactions
Can’t Be Discovered By The IRS
Think back to the first time you bought some crypto – how did you do it?
You went to a website, made your selection, and paid using money from one of your existing financial accounts. The same account which, most likely, was issued by a bank that is under the control of the United States Department of Treasury.
Let’s not forget that the U.S. Department of Treasury are the ones who ultimately forced the Swiss to abandon their notorious bank secrecy laws, which were protecting the Nazis after looting all of Europe. These are not people that you want to underestimate.
Do you really think they can’t force these U.S.-based credit/debit card issuers to produce the identities of every card holder who used their cards to buy crypto?
Oh, and they got Al Capone. Before there were computers and social media, they got Capone.
Misconception #3 – Buying Crypto Currency With Other Crypto Is Not Taxable
Most of the forums that you’ll read online agree that buying crypto with other crypto is not a taxable transaction. These forums assert that using a long-standing IRS tax code mechanism called “Like/Kind Exchange” makes these transactions above being taxed.
Unfortunately, the IRS has already ruled that these transactions 1) are designated as individual asset sales, and therefore 2) don’t qualify for “Like/Kind Exchange” treatment.
Oh, and believe it or not, Congress almost killed the “Like/Kind Exchange” mechanism in the most recent tax code changes. It’s best not to rely on something that could turn to vapor on a Congressional whim.
Each and every crypto transaction—including this morning’s Starbucks bought with the debit card on your crypto balance—must be reported on your tax return. It’s the same filing requirement for day trading or stock transactions. Short term or long term. Gain or loss. It doesn’t matter, you have to report it.
If you have unreported crypto transactions for past years, then you’ll need to amend those years’ tax filings if you hope to avoid the upcoming IRS dragnet.
And that’s just the beginning. There’s also the FBAR disclosure requirement for virtually every crypto exchange (Coinbase being nearly the only exception). More on that really soon.
My Tax Guy in Houston has been thoroughly studying crypto currency issues and is ready to handle both your questions and your tax preparation for any crypto tranasactions.
Other tax issues we can help you with include Uber/Lyft drivers, Air BnB operators, and Hurricane Harvey damages.