What is The Cryptocurrency Tax Fairness Act of 2017 and how could it affect my Bitcoin transactions?

October 13, 2017 by: Michael Collins

So maybe you own some Bitcoin but, like my 6 year old with tooth fairy money, it’s burning a hole in your pocket. Maybe you are eyeballing a new video card for that mining rig to capture some more NEO and get GAS from newegg.com or you might just be picking up a much-needed microvelvet lounger for the pooch at overstock.com.  The good news is you can pay for all of this with just a little bit of Bitcoin.

Well, under today’s rules, those purchases result in a capital gains (or loss if your timing is as bad as mine).  That is because the IRS currently identifies Bitcoin as property.  They laid the groundwork for this treatment in Notice 2014-21 (click here to read n-14-21), which I personally believe was rushed just to get something out there as cryptocurrencies began growing exponentially in popularity and there was no previous guidance as to the tax treatment.

Our friends in the U.K. have a little more breathing room than we do here in the U.S.  While the IRS equivalent in the U.K. identifies Bitcoin and other cryptos similarly, as property, they also give each tax payer an exemption of £11,100 (around $14,000 US dollars) so that those spending it like cash don’t get hammered with capital gains taxes.  They actually have capital gains taxes there too – even spelled the same but read it in your best John Oliver voice for the most accurate pronunciation.

Here in the US, we currently have no exemption so every single Satoshi of Bitcoin you spend is treated like a property sale and subject to either long-term (hopefully) or short-term (not hopefully) capital gains taxes depending upon how long you held it (or, better yet,  how you identified it – which I will explain in a future column).  Every single transaction.  Even the .000213 BTC fee on an exchange of two other coins.  In the stock exchange world, transaction fees can simply be added as part of the cost of the transaction and get added to the basis.  In the crypto world, the fee itself is its very own transaction, treated from the current IRS perspective as a unique sale of property on its own. Note to self – if an exchange will accept USD for transaction fees, pay it with that and just add the fees in as part of the basis of the acquired coin.  That would also save a lot of cost on these exchanges that are slow to adjust the crypto rate as the value of the coin increase against the U.S. dollar.  More about that in a later column too.

With all of this incredible hassle to just spend Bitcoin in the United States, how will it ever truly catch on and be perceived widely as a viable alternative currency, rather than a black market of criminals who aren’t paying taxes anyway?

Enter our heroes, Representative Jared Polis, D-Colo., and Representative David Schweikert, R-Ariz., who serve as chairmen of the Congressional Blockchain Caucus.  In recognition of the challenges faced in its growing adoption, the Caucus was formed during the 114th Congress in February of 2017 to educate and inform policymakers on blockchain technology and help the United States remain competitive in the international arena.

Polis and Schweikert introduced The Cryptocurrency Tax Fairness Act of 2017, which by its very name and the fact that they belong to different parties, suggests bipartisan understanding of the dozens of complaints generated by my last column that paying capital gains taxes on every single transaction is just “not fair.”  I could use other quotes besides “not fair” but I’m trying to avoid an R- rating.

As the IRS strong-arms exchanges into revealing the potentially unreported, tax-consequential activities of their customers, Polis and Schweikert seem to have taken the stance that at least part of the blame for low self-reporting falls on the IRS for providing only vague guidance for taxpayers and preparers about the tax treatment of something with hybrid-like characteristics such as cryptocurrencies.

Prior to the introduction of The Cryptocurrency Tax Fairness Act of 2017 in September, Polis and Schweikert sent a letter to the Commissioner of the Internal Revenue Service, John Koskinen, requesting that the IRS “clarif[y] how to properly tax these forms of transactions.”  Polis expanded by saying, “I look forward to hearing from Commissioner Koskinen and receiving clear-cut guidance for how digital currency users report their taxable income.”

The opinion of Polis and Schweikert seems clear that buying a soda from a Bitcoin-friendly vending machine should not trigger a capital gains tax situation and that eliminating capital gains taxes on at least some of the day-to-day transactions is exactly what they hope to accomplish.   Like in the UK, the Act would exempt transactions under a certain amount from triggering a taxable capital gain.  Unlike in the UK, the exemption is not $14,000 US, only $600.  That is not anywhere close to where I would like see it, and this Act still has a long way to go before it becomes reality, but it is a huge step in the right direction as recognition of the legitimacy of cryptocurrencies in the United State continues to gain ground.

If you would like to receive updates to new topics addressed by the Crypto Tax Corner, be sure to follow us and consider supporting future content with a small donation by clicking here: Donate to the Crypto Tax Center.

© Michael L. Collins

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The Crypto Tax Center

The Crypto Tax Center aims to provide, in a fun and informative way, timely, accurate and relevant information related to the income tax effects of owning, trading and spending all forms of cryptocurrencies.  To stay up to date on the latest policy changes and how they may affect you as an investor, be sure to sign up for email updates.

 

This is not your fathers coin collection.

Well, I have picked up a new hobby:  Coin collecting.

It might not be exactly what you think, though. Sure, I have the state quarter sets tucked away for my grandkids someday and a nearly complete wheat penny collection minus a few of the rarest, such as the particularly elusive 1943-S copper Lincoln wheat penny, one of which sold at an auction in 2012 for a cool one million dollars.

Yeah, I will never be completing that set.

The coins I am currently collecting are considerably less tangible:  Bitcoins.

Bitcoin is the most well-known of hundreds (maybe thousands) of cybercurrencies created in the last decade, also called cryptocurrencies.

I first learned about Bitcoin in a Forbes magazine article back in 2013 which detailed how Bitcoin became legitimate currency when someone bought two pizzas for 10,000 Bitcoins in 2010. At the time, they pretty much got the pizzas for free because Bitcoin was considered worthless.

Before that transaction, Bitcoin had been some kind of thought experiment turned cyber-trinket via programming – I don’t fully understand.  But I do know it is dispersed as a reward for people willing to use their computers for a new kind of processing called block chain technology.  I don’t fully understand that either, but apparently this technology is changing the way companies around the world do business.

The phrase “block chain” represents the functionality of these new systems utilizing a network (or chain) of computers all over the world to perform tasks which are conducted in full view for all the world to see.  Since the systems are decentralized (i.e. not sitting in one giant server room under the control of only a few people), the information is instantly documented worldwide and cannot be copied, altered, forged or modified.  Think of it as having a million witnesses to every transaction made.  Again, I don’t get it entirely, but people who I think are pretty smart seem to get it and the logic hovers close enough to my conceptual abilities that I have become convinced there is something there.

So why would all of these people be willing to use their personal computers to participate in these block chains?  Because they get rewarded with Bitcoin…  Or Litecoin, or Etherium, or Neo, or Monero.  I could go on and on depending upon which block chain you are referring to and what digital currency gets rewarded.  They call that mining.  So if I say to you, “I am mining Bitcoin!” what I am really doing is participating in the chain of computers that are processing billions of transactions in order to get rewarded with a cybercurrency which I can then take and spend at a surprising number of locations around the world.

I am not mining for Bitcoin, though.  I am not that smart.

What blew me away was that the 10,000 Bitcoins used to pay for two pizzas in 2010 were valued at $7 million by 2013 when the Forbes article was published.  As I write this column, those same 10,000 Bitcoin today are worth $43 million.  I hope it was some seriously good pizza.

I may not fully understand block chain technology or cryptocurrencies but one thing I can do is math.  A 7-year return of $20 in pizza to $43,000,000 is the kind of growth investors only dream about.  So I started saving my lunch money and bought some Bitcoin.

Honestly, it was pretty scary.  The digital currency world is still something of a Wild West, full of hackers, liars, and cheats anxious to get their hands on your money.  But things are happening in the cryptocurrency world to push the market towards legitimacy.  With a market capitalization of close to $150 billion in cybercurrencies, legitimate, reputable and, more importantly, INSURED, exchanges are being established.

I was actually able to dip my toes in the crypto world even before investing my lunch money by following The Bad Crypto Podcast.  You can visit their website at http://badcryptopodcast.com or just listen to the podcast, which walks you gently through how it all works from offline digital wallets to two-factor authentication security.  Even better, they tell you how to set up a free account on a major U.S. exchange and give you 150 thousand free Badcoins, a cybercurrency they created so listeners could simply try out making transactions on the exchanges.  It’s fun and free and doesn’t even require a credit card or an ID to start playing with their cyber-coin, which they are clear to point out is worthless.  You can play with real, albeit worthless, coins on a real exchange.

At the end of the day, I have no idea what is going to happen with Bitcoin or cybercurrencies in general, and you certainly shouldn’t take anything in this column as a recommendation from me one way or another.  The sky could fall tomorrow or, as the hypesters say, they could all be driving Lamborghinis as prices rocket to the moon.

As for me, I’ll stick with only risking my lunch money and keeping it a hobby for now, but it sure is interesting to watch – even if I do have to bring a few slices of leftover pizza from home, which, I am thankful to say, did not cost me $43 million dollars.

© Michael L. Collins

This column appeared in the October 4th edition of The Mountain Press under the name “The wildwest of bitcoin: or how two pizzas cost $43,000,000.”

What are the tax implications of investing in Bitcoin and other cryptocurrencies? (United States Tax Code)

October 9, 2017 by: Michael Collins

Investing in cryptocurrencies can present some real challenges at tax time.  Well, that is for the few that actually report it on their tax returns.  The IRS reported that in 2015, just over 800 tax returns (out of nearly 250 million returns filed) reported capital gains tax on bitcoin or other cryptocurrency transactions.  That is about .00032% – a smaller ratio than the value of bitcoin to the dollar when the infamous pizza transaction occurred.

As a noob to cryptocurrency, the temptation to not report is understandable.  But, alas, I am a CPA and tax avoidance wouldn’t bode well for my conscience or my license – especially given those darned ethics requirements.  So, I will report any gains or losses I may incur and will suffer the tax consequences with grace.

The unfortunate part for those non-reporters is that the IRS has some pretty savvy folks working there and it didn’t take long for them to figure out that if the market cap for cryptocurrencies hovers around $150 billion, then there are probably more than 800 Americans making money on it.

Ruh Roh, Shaggy.  It looks like what happens in the Mystery Van may not stay in the Mystery Van after all, especially given that the IRS has issued John Doe summonses to exchanges like Coinbase demanding they disclose the identities and activities of previously anonymous investors.

So, if you are an honest investor and plan to report gains and losses or if you are an, ahem, previously undisclosed investor looking to go back and amend a few tax returns before Uncle Sam comes knocking on the door with his “interest and penalties” stamp in hand, then I hope to help with a series of blog posts I plan to publish in the coming weeks.

I am open to other topics so feel free to send me suggestions but for now my rough plan is to provide posts related to the following topics.

  • How to track gains and losses (even your purchase using Bitcoin at the local store might make you subject to Capital Gains taxes)
  • The Cryptocurrency Tax Fairness Act of 2017 and what it means to you.
  • Mining – It’s not a hobby, it’s a business!
  • Trading your coin in a tax-sheltered, self-directed Roth IRA – (not necessarily as great as it sounds for serious investors but not a bad idea either.)

Here is a teaser… if you built a monstrous computer with four GPUs and have been mining coin for a while and your utility bill shot through the roof, The IRS may actually owe you some money instead of the other way around.

I hope you will follow me, upvote me and heck, maybe even send me some Bitcoin, which you can do by clicking here:Donate to the Crypto Tax Center.  If you would like to see more about my thoughts on cryptocurrencies be sure to follow my blog and like my facebook page.

© Michael L. Collins