It’s tax season again, and unlike last year at this time—when many Bitcoin investors were sitting on exponential 2017 gains—there may be another reason for cryptocurrency holders to file their taxes: the possibility of a Bitcoin tax refund.
The price of Bitcoin fell nearly 74% in 2018, making it likely that many people sold their cryptocurrency last year at a loss. And just like the IRS requires paying taxes on capital gains, so too can losses be deducted on tax forms, lessening what tax filers owe or increasing their eligibility for a tax refund.
But figuring out the Bitcoin price when you bought it—also known as cost basis—and the price at which you sold it may be harder than it seems, says Jake Benson, founder and CEO of Libra, which built the first cryptocurrency tax calculator. That’s because the IRS does not require cryptocurrency brokers to provide clients with the traditional form, known as a 1099-B, that stock brokers must use to provide such information to customers, Benson explains on the latest episode of Balancing the Ledger.
“The burden is left upon the fund or the individual that’s trading to track cost basis, and this is extremely challenging,” says Benson, calling on the IRS to update its guidance on the issue. “Some customers track their cost basis, some rely on proceeds, and it’s a really challenging scenario.”
TurboTax and H&R Block—the mainstays of do-it-yourself tax filing—may not be sufficiently versed in the complexities that come with cryptocurrency trading, Benson adds, so many people might want to seek out an accountant specializing in crypto.
Libra works with institutional cryptocurrency investors and firms, including Circle and Mike Novogratz’s Galaxy Digital, helping them calculate their investment performance and net asset value (NAV), and produce financial statements for auditors—some of whom are also Libra clients.
Those services could also be a stepping stone towards the approval of a Bitcoin ETF, or exchange-traded fund. The U.S. Securities and Exchange Commission (SEC) has rejected multiple applications for a Bitcoin ETF, citing a lack of oversight and safeguards, as well as concern that it would be difficult to consistently calculate NAV, and that Bitcoin trading “seems impossible to audit effectively.”
Benson, however, thinks Libra may be able to help with at least some of those problems. “I think it is currently being solved,” Benson says. “We’re not solving every piece of the infrastructural issues, but on an auditability side, on an evaluation side, yes, that is what we focus on.”
The AICPA recently asked the IRS for some equitable relief by adopting a “de minimus election,” which provides a $200 threshold for excluding capital gains income on personal transactions.
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If a taxpayer purchases virtual currency (cryptocurrency) and spends it on personal use, the IRS requires him to calculate a capital gain or loss on each transaction. Capital gains on personal-use property are reportable and subject to tax, whereas, the IRS disallows capital losses.
The AICPA recently asked the IRS for some equitable relief by adopting a “de minimus election,” which provides a $200 threshold for excluding capital gains income on personal transactions.(See the AICPA letter and an excerpt of the de minimus rule proposal below.)
If a taxpayer acquires virtual currency as an investment, though, then all capital gains and capital losses are reportable, and the de minims rule should not apply.
The AICPA suggests the IRS apply a similar de minimus rule used for foreign currency transactions in Section 988(e)(2) (see below). The code section refers to personal purchases, not Section 162 business or Section 212 investment property. For example, if a taxpayer acquired Euros for a European vacation, the de minimus rule applies, and the taxpayer can exclude capital gains on the Euros spent if the capital gain is under $200 per transaction.
The IRS does not permit taxpayers to deduct capital losses on personal-use property, including foreign currency or virtual currency held for personal use. Taxpayers may not deduct capital losses on the sale of a private auto or a primary residence.
Examples of using crypto for personal use vs. investment property
1. Joe purchased one Bitcoin in early 2017 for personal-use spending, and his Bitcoin rose in price substantially during the year. Joe planned on many vendors adopting Bitcoin as a means of payment. Joe’s original intention was for personal use, so a de minimus exemption should apply to him if the IRS approves that AICPA recommendation*. If Joe bought Bitcoin in 2018, he might have a capital loss, which would be non-deductible on personal-use property.
2. Nancy invested in 10 Bitcoins in early 2017, and her intention was capital appreciation and diversification into a new asset class. She spent Bitcoin frequently during the year on personal transactions, buying goods and services wherever Bitcoin was accepted. She hoped it would be tax-free, but it’s not.
The intention of the taxpayer is critical in determining tax treatment. If the aim is for personal use, then the de minimus rule should apply to capital gains under $200, and capital losses are not deductible. If the intention is for investment, then it’s capital gains and losses. If the purpose is for business, ordinary gain or loss treatment applies.
With tax treatment hinging on category (personal use, investment, and business), it’s wise to segregate cryptocurrency into these buckets carefully. If the IRS agrees with the AICPA proposal on the de minimus exemption, declare a crypto wallet for personal use, and the rest as an investment to protect capital loss treatment on the bulk of your crypto that you don’t plan to spend.
Excerpt from the AICPA letter
4. Need for a De Minimis Election
“Overview: Some taxpayers may only have a minimal amount of virtual currency that is designated for making small purchases (such as buying coffee). Tracking the basis and FMV of the virtual currency for each of these small purchases is time consuming, burdensome, and will yield a de minimis amount of gain or loss. A binding election applicable for a specified amount of virtual currency is beneficial to taxpayers.
Currently, section 988(e)(2) allows for an exclusion of up to $200 per transaction for foreign currency exchange rate gain, if derived from personal purchase. The same exclusion should apply to virtual currencies even though they are considered property rather than foreign currency.
Q-9: May individuals use a de minimis rule for virtual currency similar to the section 988(e)(2) exclusion of up to $200 per transaction for foreign currency exchange rate gain?
A-9: Yes. Individuals may use a de minimis rule, similar to section the 988(e)(2) exclusion, for virtual currency transactions to alleviate the burden or recordkeeping for individuals who use virtual currency as a medium of exchange. This de minimis rule allows taxpayers to exclude transactions resulting in $200 or less of gain.”
Section 988(e)(2) Exclusion for certain personal transactions
(A) nonfunctional currency is disposed of by an individual in any transaction, and
(B) such transaction is a personal transaction,
no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200.
(3) Personal transactions. For purposes of this subsection, the term “personal transaction” means any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of—
(A) section 162 (other than traveling expenses described in subsection (a)(2) thereof), or
(B) section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).”
(Note: Section 162 is for business, and Section 212 is for investments.)
* The IRS has made no indication that they intend to adopt all, or any, of the many excellent recommendations from the AICPA.
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Cryptocurrency investors and traders aren’t the only ones pleading with the Internal Revenue Service for more clarity on crypto taxation.
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The American Institute of Certified Public Accountants, the world’s largest professional association for accountants, joined the chorus on Wednesday by calling for additional guidance on matters like gain and loss reporting, expenses related to cryptocurrency mining, chain splits, air drops and more.
The IRS released preliminary guidance in 2014, known as Notice 2014-21, deeming that it considers virtual currencies as property for taxation purposes. While the cryptocurrency ecosystem has exploded in interest and market size since then, the agency has not released any additional guidelines despite pleas from the industry to do so.
“Virtual currency transactions, in which taxpayers increasingly engage, add a new layer of complexity to the analysis of a client’s reporting requirements,” Annette Nellen, chair of the AICPA Tax Executive Committee, stated in a 21 page letter from the group to the IRS released Wednesday, adding:
“We recommend the Internal Revenue Service release immediate guidance regarding the tax treatment of virtual currency transactions, similar to that of Notice 2014-21 so that authoritative guidance exists.”
AICPA claims more than 400,000 members across 143 countries. Its recommendations were developed by a Virtual Currency Task Force and approved by the AICPA Tax Executive Committee.
The letter spelled out a list of 12 specific areas in which more guidance is needed.
“Specifically, we request additional guidance that will address items from the original Notice 2014-21, and new issues that are relevant to the 2017 tax year, such as chain splits, that have arisen subsequent to the release of the original notice,” Nellen states.
Another area of focus is the current confusion in determining fair market value in a “reasonable manner” when virtual currency is spent or obtained. The letter emphasized that the prices of Bitcoin and Ethereum can differ widely at any given time depending on the exchange upon which they are being transacted.
Also highlighted was the documentation headaches posed by the required specific identification method for tracking capital gains and losses any time a transaction takes place.
“Taxpayers are required to specifically identify which virtual currency lot was used for each transaction in order to properly determine the gain or loss for that particular transaction. In many cases, it is impossible for a taxpayer to track which specific virtual currency was used for a particular transaction,” Nellen stated, while recommending that the IRS make available a “first in, first out” (FIFO) tracking option as well.
The AICPA letter also called for a de minimis rule that would exempt any transaction under $200 from taxation. Noting that such an exclusion currently exists for foreign currency transactions, it urges that “[t]he same exclusion should apply to virtual currencies even though they are considered property rather than foreign currency.”
Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!