written by Jacque Mattson
Digital currency, also known as cryptocurrency, made its big entrance into the world during 2017. Whether you use Bitcoin or other “altcoin” currency for trading, exchanging, receiving of payment, spending, or converting, there are tax implications related to these transactions that should not be overlooked.
It is important for cryptocurrency owners to properly track the purchase of these currencies by date and price paid in order to keep an accurate basis, which is generally defined as the price the taxpayer paid for the cryptocurrency asset. The treatment of the cryptocurrency can become a challenge if a taxpayer is using it for everyday purchases because a taxable transaction occurs every time that a cryptocurrency exchange occurs.
For example, if you purchase 1 Bitcoin for $1,500 and then use that 1 Bitcoin to purchase $2,000 worth of items, then there is a taxable gain of $500 on the purchase either short-term or long-term depending upon the time that the cryptocurrency was held. There is no “de minimis” exception to the gain or loss recognition and basis has to be tracked continuously to report on each crypto transaction properly.
A deduction is allowed only for losses incurred in a trade or business or when a transaction is entered into for a profit. If a taxpayer made a purchase for merchandise and that purchase results in a loss, then the loss may not be deductible. If the transaction is an ordinary, everyday purchase and the cryptocurrency is not held for investment then the loss is a nondeductible personal loss. However, if the currency is held for investment and that investment is cashed out through a purchase of goods then the loss is a deducible investment loss. The determination of held for investment or personal property may be difficult to determine.
It should also be noted that a payment using cryptocurrency is subject to information reporting to the same extent as any other payment made for property. If cryptocurrency is used in a trade or business transaction, any payment of $600 or more is required to follow the reporting requirements to the IRS and the payee’s payments are subject to backup withholding. IRS Notice 2014-21 provides further information and guidance related to cryptocurrency.
Please contact us if you have more questions about cryptocurrency transactions 417-881-0145.