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Investors in cryptocurrency need to be aware of tax implications

While the IRS is targeting virtual currency transactions as a potential source of new revenue, IRS rules are complex and ambiguous, says Houston CPA firm MGA Advisors.

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Paul Grossbard on cryptocurrency taxes
"The IRS is targeting virtual currency transactions as a potential source of additional tax revenue, but it has issued insufficient guidance on the reporting requirements."
Paul Grossbard, Partner, MGA Advisors, LLP

With all the excitement around cryptocurrency, Houston CPA member MGA Advisors comment that "it’s easy to forget about the taxation that comes along with it." The firm gives its view in the piece below that investors in Ethereum, Ripple, or other “altcoins” could receive an unwelcome surprise when filing their 2017 returns.

Cryptocurrency (sometimes known as a virtual, digital, or electronic currency) is a digital asset which is traded and secured using cryptography. Bitcoin, the most widely recognized type of cryptocurrency, has an equivalent value in traditional currency, and is digitally traded peer to peer using a decentralized system referred to as Blockchain. 

“Bitcoin wallet” software enables the holder to pay for goods and services, and a growing number of businesses are now accepting Bitcoin as payment. Bitcoin is also gaining popularity in foreign countries such as Argentina and Iran where national currencies are subject to inflation, corruption, or international sanctions.


Tax implications

Despite its existence for over a decade, the tax rules concerning Bitcoin virtual currency are still developing, and tax-related questions remain unanswered to some degree. Rather than a form of currency, the IRS has specified that it considers virtual currency assets as property rather than as traditional currency. As a result, there could be capital gain implications. While the IRS provided guidance (in Notice 2014-21) there have been no further updates since. 

So what does the IRS say about cryptocurrency, and how does it impact you? MGA Advisors point to six issues taxpayers need to be aware of: 

  1. Selling cryptocurrency at either a loss or a gain should be reported as a capital transaction
  2. Cryptocurrency cannot be exchanged tax-free for other currency. For example, if you traded one Bitcoin for eleven Ether coins, that would be considered a taxable transaction
  3. Receiving cryptocurrency for the sale of a product should be reported as income (converted to U.S. dollars) as of the date of receipt of the coin
  4. Mining of coins is considered income equal to the fair market value of the coin on the date received
  5. If you purchased something using Bitcoin or any other “altcoin” and the fair value of what you received is worth more than your basis in that coin, you also have a gain
  6. Taxpayers will be subject to penalties for underpayment and other accuracy-related penalties for not reporting correctly.

There are various exchanges where individuals can create accounts, deposit U.S. dollars, and purchase Bitcoin or other cryptocurrencies e.g. Coinbase. It should be pointed out that the IRS filed a lawsuit against Coinbase and other exchanges requiring them to provide information about users on their exchanges and the transactions undertaken. This shows that the IRS is targeting taxpayers who have made potential gains to ensure their transactions are reported.

What are the implications?

Ultimately, the IRS is targeting virtual currency transactions as a potential source of additional tax revenue, but it has issued insufficient guidance on the reporting requirements. MGA is predicting that the tax implications of cryptocurrency will become even more complicated for 2018 returns. 

For advice on tax related to cryptocurrency

Contact Paul Grossbard at MGA Advisors for help in deciphering the complex rules related to these new assets.