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September 11, 2020

Crypto Tax Events Professionals Ought To Know: Purchase of Goods

Purchasing with Crypto

Click here to read CryptoTax: Events Professionals Ought to Know Part 2

Overstock.com is heralded as the first major retailer to start accepting bitcoin purchases back in January of 2014. Since then several leading e-commerce platforms have followed suit such as Expedia, Shopify, Twitch, and even telecom giant AT&T. Typically these companies will accept cryptocurrency through payment providers such as BitPay, Coinbase Commerce, and others. Amazon does not (yet) offer crypto as a payment option, however, many e-commerce sites will allow you to buy Amazon and other gift cards with crypto which can then be redeemed at your favorite retailer. Paypal has been a payment and withdrawal option for several crypto exchanges for years, but recently rumors have been circulating that the fintech giant may “allow buys and sells of crypto directly from PayPal and Venmo”. (On October 22, 2020 those rumors were confirmed.) Virtual currency such as bitcoin and ether as a means of payment is slowly gaining wider acceptance, but what are the tax ramifications of using crypto as a means of payment for goods and services?

Taxable Event: The Purchase (of goods/services)

According to IRS Notice 2014-21 “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” Since crypto is treated as property for federal tax purposes, exchanging crypto for a good or service results in a disposal of the crypto, and consequently a short or long term gain or loss would need to be calculated and reported. According to the October 9, 2019, virtual currency FAQs, First-In, First-Out (FIFO) and Specific Identification are acceptable cost basis methods. Consider this example. You purchased $100 worth of bitcoin with cash on Monday from a popular exchange such as Coinbase. A few days later (let’s say Thursday), you decide to settle your AT&T bill with said bitcoin. Yup, you would need to compute and record the gain or loss derived from the difference between the price you paid to purchase the bitcoin on Monday and the fair value of bitcoin at the time you settled your phone bill. Ouch!

Dude, It Was Just A Coffee

Wait, that’s crazy? I’ll stick with cash and card, thank you very much! I mean, isn’t there some sort of microtransaction threshold exclusion? As it stands now all gains or losses regardless, of size, will need to be reported.  There was an effort back in 2017 by US lawmakers to push through legislation that would essentially allow consumers to make smaller purchases below a $600 threshold, without the related burdensome reporting requirements. However, the bill did not even make it past the House Floor.  In January of 2020, two members of Congress continued their efforts to make it simpler for the people to use virtual currency in their daily lives. They introduced a bill entitled the “Virtual Currency Tax Fairness Act of 2020”. The bill would provide for a de minimis exemption for personal transactions where the gains are less than or equal to $200. The AICPA also submitted their recommendation in a comment letter to the IRS, “Treasury and the IRS should offer administrative relief by allowing a de minimis exclusion for virtual currency, similar to the exclusion allowed for foreign currency transactions. Tracking small amounts of gain or loss on transactions of low value creates a situation where the administrative costs outweigh any possible tax on the immaterial transactions.” Unfortunately, there is not that much we can do to expedite the crypto tax regulatory processes. Fortunately, however, what we can do is make it easier than ever before to calculate and track crypto gains, losses, and cost basis across all your crypto wallet and exchange activity. AICPA SOC Certified Ledgible Tax solution can do the heavy lifting for you while giving tax professionals the ability to manage their clients’ virtual currency tax from a portal that integrates directly with the clients’ wallets and exchanges.  Now let's move on to another taxable crypto event: The Swap.

Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.

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