With Ryan Losi, Executive Vice President of accounting firm, PIASCIK
2017 was a banner year for cryptocurrencies, especially for Bitcoin. But amidst the hype, no one really spoke about the taxable aspects of owning these currencies. To fill this gap, Steve speaks with Ryan Losi, Executive Vice President of PIASCIK in Glen Allen, Virginia. Ryan leads the firm’s international tax practice and advises digital currency holders.
Bitcoin Taxes Not So Straightforward
Like any other investment, anyone who bought and sold digital currencies in 2017 will have to report profits or losses on their federal tax returns. That, in itself, isn’t really surprising. What is surprising is how the IRS is splitting hairs over the tax implications, ownership, and usage of cryptocurrencies.
Bitcoin Tax Example
Here’s an example: Say you bought $5,000 worth of Bitcoin in mid-2017 and it rose to $10,000. Like stocks, the IRS wants you to track your purchase date, cost basis, sale date, and closing transaction. Your closing transaction could be selling your Bitcoin stake in one shot for $10,000 or its foreign currency equivalent, selling Bitcoin at various profit levels over time, or simply using your Bitcoins along the way to pay for coffee, buy a laptop, make a down-payment on a car, pay for a dinner date, etc.
While using dollars in your pocket for purchases is non-taxable, the IRS wants you to note what you got in exchange for your initial investment at every Bitcoin transaction, even paying for that cup of coffee or that dinner—making every transaction taxable, either as short-term or long-term gains or losses reported on Schedule D. Even though you are not officially selling Bitcoin and are just using it as currency, the IRS isn’t thinking of it as money but as property.
The best way to look at it is to assume Bitcoin taxes are equivalent to using shares to pay for goods and services.
No 1099 For Bitcoin Tax
Moreover, the onus on reporting falls completely on you because no one’s going to give you a 1099 when you sell your Bitcoins! So you had better keep very good records on all of your cryptocurrency transactions. As Ryan points out, the IRS received under 1,000 Schedule Ds for virtual currencies even though there are over 12 million account holders. Clearly, only a fraction of people are reporting Bitcoin taxes.
Bitcoin Tax For Miners
Miners are a select few computer programmers who are gifted a cryptocurrency if they manage to solve some complicated algorithms. In such cases, the IRS sees the gift as payment for services provided; so miners need to report the Bitcoin grant as gross income earned.
In regular service sectors, there is a provider and a user of a service, two sides to each transaction. If you’re mining for gold, you lease someone’s land to look for gold. But there is no one on the other side of a Bitcoin grant transaction because there is no other party receiving the service.
In such cases, you may not want to follow the IRS’s guidance and, instead, take the position that it’s not a recognizable event until you dispose of the virtual currency that you mined. It’s not like you went out and bought it. So, the big question is, is it taxable upon receipt when you’re a miner or is it not? And you can make the case that there is no income if you mine a Bitcoin.
If you decide you want a piece of cryptocurrency action, don’t bank on its anonymity or think the government has no way of tracing your transactions. Instead, carefully track your usage and dates when you buy, sell, or transact with Bitcoins and stick with IRS Bitcoin tax rules even if you sell it in some foreign currency or country. And if you’re smart enough to be a cryptocurrency miner, you might have grounds to not report your Bitcoin grants as income until you close them out.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: We talk a lot about cryptocurrencies like BitCoin and others like that, but we never really talk about the taxable aspects of owning these currencies. And this kind of got my attention, so I invited Ryan Losi. Ryan is a partner and executive vice president of PIASCIK in Glen Allen, Virginia, and he leads the firm’s international tax practice and advises on digital currency holders.
And, he’s with me right now, welcome him to the show. Hey, Ryan, thanks for coming.
Ryan Losi: Thanks for having me.
Steve Pomeranz: So, anyone who bought or sold digital currencies in 2017 are going to have to report profits on their federal tax returns. Now that’s not really surprising, but what is surprising is the way the IRS is kind of splitting hairs as to whether you’re an owner or you use it for a transaction or you’re even a minor.
So, let’s start with an owner. 2017 comes along, I decide, hey I want to own some BitCoin. I buy it at $5,000, it goes to $10,000, and I sell it. And what kind of taxes am I liable for?
Ryan Losi: Sure, sure. So, Steve, what you’re supposed to do and really kind of what the IRS has indicated in their guidance to the public, was you need to track the date of acquisition, as well as what was the trading price during that day to establish your cost basis, and then you’re supposed to track when you had a sale or disposition, sale, or exchange.
So, it could be an outright sale, and let’s say you convert it over to cash or some other foreign currency outside the US, but it’s also exchange. So, if you took that value and exchange it for service, you went out and bought a vehicle, you paid for Starbucks coffee, then that would also generate a taxable event and so you’re supposed to track that.
And that date would trigger whether or not it was a short-term or long-term capital gain for purposes of the lower long-term capital gains rates.
Steve Pomeranz: Wow, I could see buying it and then selling it. Fine, you pay your capital gains. And by the way, there’s no 1099 that’s issued.
You better keep very good records when you’re doing this because, again, there’s no Fidelity or Schwab out there that are going to be sending you a 1099 at the end of the year, right?
Ryan Losi: Exactly, exactly. And that’s part of the point is the service did an analysis of how many tax payers were reporting schedule D capital gains from the sales and exchange of virtual currencies, and I think it was under a thousand returns, but there is also Coinbase has over 12 million account holders.
Steve Pomeranz: Someone is not reporting with you, is that what you’re trying to say?
Ryan Losi: I think that’s a pretty wise assumption.
Steve Pomeranz: All right, but here’s what really throws me for a loop. So I’ve got these Bitcoins; I bought five Bitcoins, you know, whatever next to nothing, and I decide that I want to go get a cup of coffee.
And in this fake world, where you can actually use bitcoins for something like this without paying all the fees, and all of that, where it actually makes sense, you buy your coffee, or you buy a car, or whatever, you go to the movies, you use it for that. You now have to pay taxes on the sale, the difference between your purchase price and the actual sale, even though you are not officially selling it, you’re just using the coin, you are thinking of it as a currency, but the IRS isn’t thinking of it that way.
Ryan Losi: Well, the IRS features property, and it’s property that has value, and that’s the reason why, you’re exchanging that property, and that’s where it comes in with those regards to determining gain or loss. Now, if the price is continuing to increase, then you’re right, there will be a tax consequence from a standpoint of there’s maybe some tax due because there’s a gain.
But if there’s declining value from the time you exchanged it, there could be a capital loss.
Steve Pomeranz: Okay, okay. Fair enough, fair enough. So, it’s almost like you went to pay for this stuff with a certificate of stock, that’s the way I think.
Ryan Losi: That’s the best way to look at it.
Steve Pomeranz: Look at it. So, yeah, hey, I’ve got this stock, I’ll give one share of XYZ as payment for this car. And well, the IRS is going to look at that, well you actually sold that stock, so it’ll be the same thing as a currency. Cool.
Ryan Losi: Yes, sir.
Steve Pomeranz: All right, now let’s say that I was a miner, M-I-N-E-R, who created these currencies, basically out of thin air using your computer and some complicated algorithms. How is the tax treatment for that?
Ryan Losi: Well, the IRS’s public position in the notice that they issued guidance on is that they treat that specific transaction—you got this computers that are generating hash, and you happen to get the right algorithm right and all of a sudden, let’s take Bitcoin for example, you get a one Bitcoin debited to your virtual wallet—the IRS says that you need to treat that as if that was a payment for a service that you have provided, so a service payment, which is gross income.
It’s just like if you are doing contractor work and receive a 1099 for payment for your services; so it’s gross income and it goes on your tax return.
Steve Pomeranz: Yes, so who is on the other side of this transaction? You’ve got to have two people.
Ryan Losi: Well, that’s the problem is that practitioners like myself and in this service-income, there is two parties.
Steve Pomeranz: Yeah.
Ryan Losi: There’s two parties, there’s one that receives the service and the one that made the payment. And in the context of virtual currency and mining, if you’re mining, like out there in gold mine, you lease someone’s land to go out and dig and you find a gold nugget, or you get a Bitcoin that you solved an algorithm, there is no other party receiving the service.
You’ve just identified something so, and a lot of practitioners are looking at it and going, if you are miner, you may not want to follow the IRS’s guidance, and you may want to take the position that it’s not a recognizable event until you dispose of that virtual currency that you mined.
It’s not like you went out and bought it. And so, the question, and it’s a big question, is it taxable upon receipt when you’re a miner or is it not? And I think there is a position to say that it’s not.
Steve Pomeranz: Well, we’re running out of time here so I think the bottom line is that.
Steve Pomeranz: We talk a lot about cryptocurrencies. We’re going to be talking about them a lot more as the years unfold, but nobody talks about the taxes and the fact that you really, every time you do something, you’re paying the government a pretty much of a fairly whopping amount of the value of that coin or currency.
So, watch out, be careful, and know what you’re doing before you do it. My guess, Ryan Losi, a partner executive vice president for PIASCIK. And by the way, that’s P-I-A-S-C-I-K .com. Of course, we will have that on our website, and don’t forget that you can search all our archives to find any topic that you would like, including topics on taxes and investments and everything else in this world.
And to hear this interview again or to read the facts covered on this topic go to stevepomeranz.com. Hey Ryan, Thanks for joining us so much.
Ryan Losi: Steve, thanks for having me.