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First and foremost, our office accepts cryptocurrency as payment. Currently, we accept Bitcoin, Litecoin, Bitcoin Cash and Ethereum.
DISCLAIMER: THE FOLLOWING INFORMATION IS NOT LEGAL ADVICE. THIS IS GENERAL INFORMATION AND DEFINITIONS VARY FROM STATE TO STATE. PLEASE CHECK WITH A LOCAL ATTORNEY OR CONTACT THE IRS WITH ANY QUESTIONS.
So who has been here for the ride all along and who just got on the Bitcoin train? Regardless of when you started you are probably wondering HOW THE HECK DO I REPORT THIS BITCOIN (and other altcoins Litecoin, Ethereum, etc) For now, we will just use the word Bitcoin as synonymous for all cryptocurrencies.
How does one report gains or losses from Bitcoin to the IRS? That is a very complicated question and because cryptocurrency is so fluid and can be used in multiple forms I will try my best to lay out how you may report your Bitcoin to the IRS.
The one thing I read a lot about online with cryptocurrency gurus is a hashtag called #taxationistheft and although I don’t entirely disagree with that, I disagree with NOT your Bitcoin because if you don’t report you have the potential to be hit with severe penalties and/or possible criminal failure to report or tax evasion.
Foreign Bank Account Report also known as FBAR
From my website:
First and foremost, anyone can file their own FBAR while filing their yearly IRS tax returns. There is no need for an attorney, furthermore there is no specific FBAR attorney. The reason, if we were to guess, why people think there is a need for an FBAR lawyer is due to the rules and complications when a taxpayer forgets to file their FBARs and the potential criminal consequences. FBAR stands for Foreign Bank Account Report which must be filed every year that you meet the requirements to file an FBAR on form TDF 90-22.1. Over the last few years the IRS has made a push to seek out and prosecute taxpayers with foreign bank accounts. It is an initiative the IRS started at or around 2009 and also led to FATCA which started in 2010 in order to find Americans with foreign accounts. The positive part of this aggressive tactic is that the IRS has also created several programs to help those that are willing to come forward before the IRS finds you. You may not need a tax attorney to file your FBAR if you are current (meaning you’ve never been late on filing an FBAR), but if you have forgotten to file and report your past FBARs, then you should find a tax attorney that knows the rules and can help you minimize your penalty and tax liabilities, and most importantly try to prevent any criminal prosecution.
So why am I talking about Foreign Bank Account Reporting when discussing Bitcoin? Well there is tax case that the IRS brought against a Mr. Hom where the IRS was successful in convincing a judge that an Online Gambling account required FBAR reporting. So it can be argued that Bitcoin depending on various factors may also be subject to FBAR reporting. I can tell you from personal interactions with IRS officials that actually work in the IRS’s foreign asset division that they are giving NO CLEAR guidelines for FBAR reporting. At a conference in October of 2017 I specifically asked “what is the IRS’s position on whether cryptocurrency owners are required to file FBARs?” The IRS attorney responded “the IRS has no position on that question” Ok, really?
Therefore, I will tell you that I myself will be filing FBARs for my own cryptocurrency and can’t say for sure whether you should or shouldn’t, but one can assume from potential senate bills that the IRS and congress are very vested in clarifying that cryptocurrency should be reported whether you sell or don’t.
Sale or Exchange (but for now we will only talk about sale of Bitcoin)
Selling your Bitcoin:
This is probably the most basic and easiest to understand. You can see the IRS’s only official statement as of 12/08/2017 here regarding cryptocurrency. You must report the sale of your Bitcoin and report your gain or loss. (Sale Price – Cost = Gain or Loss) This is easy because if for example you sold your Bitcoin for $10,000 and paid $1,500 the profit is $8,500 ($10,000-$1,500) so you report the $8,500 profit. Then you must determine whether its long-term or short-term gain.
This is probably the most challenging for Bitcoiners to understand. I created a video here for it, but it’s essentially this. When you trade one cryptocurrency for another, it may be treated as a sale and a purchase. For example if you traded 1 Bitcoin for 100 Litecoin what is the result? This may create a taxable transaction that is rather complicated and must be reported as a taxable transaction. Please see my video for the explanation.
Buying something with Cryptocurrency:
Another head scratcher. Very similar to trading cryptocurrency for a different cryptocurrency. Let’s say for example you trade 3 Bitcoin worth $10,000 for a Honda Accord. What is the result? Well, if the FMV of the Honda Accord is $30,000 that means you sold $30,000 worth of Bitcoin at the time of purchase. So if you paid, let’s say $4,000 per Bitcoin you have made a profit of $18,000 ($30,000 FMV of Honda – $12,000 cost basis of Bitcoin). This creates a taxable transaction on the $18,000 profit and would be subject to tax.
Yes whether you are a miner or getting paid in Bitcoin you MUST report it as income. For example, I am a tax attorney. A client comes in and pays me .5 Bitcoin for my services. At the “time” of the exchange 1 Bitcoin is worth $10,000 I will report $5,000 of income ($10,000 value of 1 Bitcoin x .5 Bitcoin fee for my services).
This can be very challenging as a lot of people chose to see Bitcoin is 2 ways 1) they see it as a real value or a stored value with worth, but also 2) as non taxable through transacting. As the hashtag I talked about above #taxationistheft may have some validity to it, it doesn’t protect you from tax evasion and possible criminal prosectution.
Please feel free to contact us if you would like to engage us for our tax services 213-545-1644