By Brian E. Ravencraft, CPA, CGMA, Partner at Holbrook & Manter, CPAs
Regardless of your opinion about cryptocurrencies like Bitcoin, one thing is for certain — they are here to stay. Since their beginnings a decade ago, much mystery has surrounded cryptocurrencies regarding their origins, value and purposes. As cryptocurrencies have become more established and accepted as payment, it is more important to understand what the treatment and consequences of purchasing, selling, paying with and accepting as payment cryptocurrencies from a tax perspective.
Per IRS Notice 2014-21, cryptocurrencies are not legal tender, but are generally regarded as property comparable to that of a stock, bond or other investments. Treating cryptocurrencies in this manner means whenever a cryptocurrency is purchased as an investment, the basis in the cryptocurrency is the purchase price plus any permitted transaction fees just like other stock that is traded on an exchange. This also means that whenever the cryptocurrency is sold, a capital gain or loss will result from its sale. Simple enough, but what happens when you pay for goods or services with cryptocurrency?
When you pay for goods or services with cryptocurrency, per Notice 2014-21, the IRS will treat that transaction the same as if you sold it. For example, if you paid $1,000 worth of Bitcoin for your purchases on Overstock.com, you would have $1,000 in proceeds for tax purposes as the payment to Overstock.com would be treated the same as if it were the sale of Bitcoin as an investment. This means every time you purchase something with a cryptocurrency you will either have a capital gain or loss depending on what your basis (value + permitted transaction fees) of the cryptocurrency was when you purchased it. That’s good to know, but what happens if you are paid in cryptocurrency?
If you are paid in cryptocurrency for either goods of services, per Notice 2014-21, it is treated as though you were paid in equivalent cash amount of cryptocurrency and you must report it as ordinary income subject to federal income tax. That amount that you were paid will also be your basis in the cryptocurrency.
The takeaway from all of this — be diligent and informed about any cryptocurrency transactions that you have made or are going to make. If you are about to purchase, sell, pay with or accept as payment cryptocurrencies remember to do the following:
- Keep records of the dates of the transactions
- Keep records of the numerical number of cryptocurrency units transacted
- Keep records of the individual unit prices of the cryptocurrency in U.S. Dollars for the transaction dates
Doing these three items will help you be compliant with cryptocurrency transactions when dealing with the IRS. If you have any tax issues with cryptocurrencies or any other tax matters, please contact your accountant. I am always available to answer your questions as well.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com