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.
Payments company Square, Inc. first allowed Cash App users to purchase and sell bitcoin during the rampant crypto boom of 2017. Since then it has continued to invest in its bitcoin offering, a move that seems to have yielded profitable results!
According to Square’s 2020 Q2 SEC filing, for the six months ended June 30, 2020 and 2019, bitcoin revenue amounted to $1.2 billion and $191 million respectively. The financials indicated that the primary driver behind the soaring 520% increase “was due to growth in the number of active bitcoin customers, as well as growth in customer demand”.
Of course Square is just one of the myriad options available for users to trade crypto today. Coinbase for example, one of the largest and most popular crypto exchanges in the U.S. boasts over 35 million users and over $7 billion in custody.
Yes, Crypto Tax Is A Priority For The IRS
The majority of crypto users are uninformed when it comes to the potential tax consequences surrounding crypto. Some think that the IRS will not be able to track or trace their trades back to their identity (ouch!).
During 2019 we saw the IRS sending out over 10,000 warning letters to cryptocurrency users to file amended returns if appropriate and pay back taxes. The IRS recently also released the 2020, 1040 draft form, where we can see the virtual currency question has moved from Schedule 1 to near the top of the main form, right under the name and address, asking, “At any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?”. “Virtual currency” was also included in the 2019–2020 IRS Priority Guidance Plan. These are all unmistakable signals that the IRS is prioritizing crypto.
Taxable Event: The Sale
So, let’s begin with the basics. Selling crypto for fiat (e.g. USD) is a taxable event. The character of the gain or loss depends on whether the crypto is a capital asset (e.g. stocks, bonds, and investment property) in the hands of the taxpayer and the length of time the position was held.
For example, “hodling” (slang in the crypto community for holding the crypto rather than selling it) crypto as a capital asset for longer than a year before selling it will generally result in a long-term capital gain or loss. If the crypto was not held as a capital asset, but rather as inventory for sale in a trade or business, the resulting gain or loss recognized will generally be ordinary in character.
Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.
A Secret Message On A Blockchain
A covert message can be found inscribed into the first block of the bitcoin blockchain, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” referring to the London newspaper’s lead story of the day.
This edition of the newspaper is now one of the most valuable crypto collectibles to date with asking prices over a million dollars!
And since those early days in 2009, crypto has steadily increased in prominence, adoption, and mainstream conversation despite naysayers predicting its demise.
Accounting firms in the US have increasingly entered the space launching their crypto tax, accounting, and blockchain practices. The AICPA released a practice aid covering both the accounting and auditing of digital assets. The OCC announced in July 2020 that national banks in the USA now have the authority to provide cryptocurrency custody services.
Crypto is simply an area that tax professionals can no longer ignore. In fact, there's tremendous opportunity for accounting service providers to grow their business by offering tax services to cryptocurrency users and crypto investment holders.
https://www.youtube.com/watch?v=13PGZrMKpb8
Wanted: Crypto Tax Savvy Professional
Crypto-savvy tax professionals are now needed more than ever given the significant confusion around crypto tax compliance. It also provides tremendous thought leadership and business development opportunity.
Back in March of 2014, the IRS issued Notice 2014-21, stating that virtual currencies are to be treated as property, rather than currency (that could generate foreign currency gains or losses) for US federal income tax purposes. Thus general tax principles applicable to property transactions apply to transactions using cryptocurrency.
The 2014 IRS notice left much to be desired and a litany of open questions lingered, given the unique make-up of this novel and emerging financial assets class.
Fast forward to now and the updated guidance received from the IRS in October of 2019 in the form of a Revenue Ruling 2019-24 and updated FAQs, sought to provide more clarity. The updated guidance, however, still left many questions unanswered and created confusion around more nuanced and complex areas (such as air drop and chain forks) that we'll get into later.
The AICPA issued another comment letter (a “must-read” if you’re a tax professional) to the IRS in February 2020 to submit their recommendations relating to the updated guidance dealing with the following five areas:
Revenue Ruling 2019-24
New Question on the 2019 Form 1040, Schedule 1
Frequently Asked Questions
Form of Guidance
Prior AICPA Recommendations Not Included in New IRS Guidance
What’s Holding Tax Pros Back?
In speaking with numerous leaders across the accounting, legal and tech community there still seems to be very few crypto tax professionals that understand how crypto works, the complexities, and the related potential tax implications.
Primary reasons that were given for this shortage in crypto-savvy tax professionals included regulatory ambiguity, lack of client demand, and uncertainty whether this is an area worth pursuing in the long run.
In this crypto tax series, we’ll explore some of the most common crypto taxable events that every tax professional ought to know and how tools, like Ledgible Tax, can empower professionals to provide a premium crypto tax service to their clients.
In Part 2 we’ll learn about the significant priority the IRS has placed on crypto and kick off with our first taxable event.
Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional
As part of the Wall Street Blockchain Alliance (WSBA), Verady contributes regularly to working papers, education, and other items on important issues around Cryptoassets and their evolving accounting and tax ecosystem in the United States. Recently, the WSBA asked Accounting Working Group members to collaborate in the creation of a response letter to the Internal Revenue Service regarding their Revenue Ruling 2019-24 as well as the subsequent FAQ’s providing guidance on the taxation of virtual currencies. The letter was designed to offer insight and recommendations, from experts in the cryptocurrency accounting industry, on “some of the most prominent outstanding questions or items for which [WSBA members] are seeking further clarification.”
The WSBA is a non-profit trade association based in New York City and the Accounting Working Group consists of leading companies with diverse backgrounds in the areas of accounting and cryptoasset tax, including Verady (represented by our CEO Kell Canty).
The response letter (which can be found embedded here) touches on a variety of issues, but leads with thoughts on perhaps the biggest disappointment in the crypto community since the IRS last released guidance… the classification of cryptocurrency as "property." And while the WSBA letter notes that there may not be a perfect classification for cryptocurrency at the moment, the current classification “as property creates additional compliance and reporting requirements that seems to neither add value to the taxpayer nor merchants accepting cryptoassets as payment for goods or services.”
Instead, the letter asks the IRS to consider “establishing a de minimis exemption for both individuals and merchants” that would establish a minimum transaction value threshold for tax reporting purposes, thus lowering the compliance burden on both smaller individual cryptocurrency users and their accounting professionals.
In further analysis Canty noted, “recent draft legislationproposing exemptions based on amount of potential capital gains may further complicate the already complex accounting and reporting issues around cryptoassets by mandating calculating capital gains on every transaction.”
The letter goes on to provide the following recommendations for other important cryptoasset tax implications, including:
Differentiating cryptoasset tax treatment based on how the it is used
Taxing stablecoins differently and in a manner consistent with the underlying basket of assets
Reviewing how Fair Market Value (FMV) and Cost Basis is determined for cryptoassets.
Providing more clarity for crypoasset reporting and disclosure
Clarifying the tax treatment for Airdrops
Guidance on how to treat stablecoin issuances for tax purposes and if they should be exempted from like-kind exchanges
Insights on the implications of treating cryptoassets as intangible asset
Cryptoasset Tax implications of Staking
Clarifying the potential tax implications of “transfer of ownership for loan and rehypothecation of assets” in the case of Decentralized Finance (De-Fi)
And asking the IRS to “continue to engage in a proactive and iterative process toward working on new standards, revenue rulings, and additional clarification of existing guidance.”
“Obviously there is a lot to work through with such a disruptive technology as blockchain. We look forward to continuing the conversation with the IRS to bring clarity and support for guidance around cryptoasset tax. Cryptoassets’ use and adoption will continue to expand and it is vital to have the guidance, compliance, and tools to support them.”
