Question: I use cryptocurrency in my daily paying for goods and services. What do I need to do about taxes with it?
F-Sharp’s Richard M. Prinzi, Jr., CPA: You should treat all transactions as if you used cash. If you pay for goods or services with any coin or token, the tax and reporting issues will be the same as cash. If you pay employees or subcontractors with Bitcoin or other cryptocurrency, you still would issue them a 1099 or W-2. You’d pay sales tax and use tax the same way too.
The most pressing issue right now is: How do you treat the transactions if you buy and sell cryptocurrency to earn profits from the changing value of this currency?
This is an easy answer: REPORT IT! Just like you would if you bought and sold a stock that was not listed on an exchange. Don’t fall into the trap of thinking that IRS can’t track the buy and sell of these currency transactions. While it is true that the IRS currently has almost none of the exchanges used to buy and sell the ever-growing list of coins, the reporting to them it is only a matter of time, and when the IRS does establish reporting relationships, they then receive the transactions for the current year and the three prior years.
As a practical matter, you will be in one of two positions when the IRS catches up with you: you’ll be a taxpayer who reported the gross sales proceeds, or one who did not. f you report the gross proceeds, for example, as $1 million of purchases and $1 million in sales, you will pay NO capital gains tax. If the IRS gets the sale proceeds reported to it and compares the information to your tax return, it will see you did report the transaction and paid no tax on them. The IRS computer is satisfied.
If you do not report the transactions, when the IRS gets the sale proceeds reported to it, and compares the information to your tax return, it will see you did NOT report the transactions and the IRS computer will calculate the transactions as a 100% profit and send you a bill. At this point, when you receive the tax bill for what would be approximately $450,000 in tax – for our example above – the burden of proof will be on YOU to prove the amount is inaccurate. Clearly the amount will be over stated and you will need to show the coins sold were actually purchased by you and not “mined” or received in some other way. When you do prove this, the IRS will adjust the bill accordingly. However, unless you are a true adrenaline junkie, it is not a good day when you have the US Government instructing you to pay a life-altering amount of money.
Short Answer: Report the transaction and let the IRS prove the cost basis you reported is not accurate. That is the position you want to be in!!! PLEASE discuss this with your tax preparer; if you prepare your own taxes, make the year you decide to trade cryptocurrency the year you spend a few tax-deductible dollars on getting some advice from a reputable licensed tax preparer.
Remember, the advice you get from any source will NOT help you if you make the wrong decision. If you chose not to report and find yourself in this position described, the IRS will not consider the advice you received from a third party as a mitigating factor.
Your tax return, your responsibility. Use common sense.