By Scott S. Frederickson
The IRS is taking special interest in virtual currencies. Starting with the 2019 tax year, on every Form 1040 we must answer the question: “At any time during the tax year, have you ever received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency?”
How are Virtual Currencies taxed?
Don’t be deceived by the name: virtual currencies are taxed more like stocks than currency. It’s not enough to just report one lump sum under the “virtual currency” category; each virtual currency you held during the year needs to be accounted for on your taxes separately. Your tax liability will be based on your gains/losses and how long you held each coin. Just like stocks, if you hold the currency for longer than a year then you reduce your tax bill by reporting long-term rather than short-term capital gains.
What Do I Have to Do if I Own Crypto?
Each time you sell or trade a coin, it needs to be reported on your taxes. And, whenever you buy something using crypto (even just a cup of coffee!), that also needs to be reported each and every time. That can be daunting. That’s where Haynie & Company comes in. We make your crypto taxes simple, fast and painless.
The time to track virtual currencies can run in the thousands of dollars. Haynie & Company has crypto tax tools to get your virtual currency right the first time. Your tax professional will email you a link to connect your crypto accounts to our platform or to upload a CSV file with your transactions. That’s it. We’ll do the rest. As always, we are available to help if you have any questions along the way.
One of the most complicated points in taxing virtual currencies is determining Fair Market Value (FMV). The basic question for any type of bartered exchange of value is “What is the value of the assets in US Dollars at the time of the transaction?” Answering that question can be difficult because crypto transactions don’t always have a clear US Dollar value. For example, if I trade 3 Bitcoin for 150 Ethereum in a private transaction, there isn’t an established value in dollars. It would be like swapping a Toyota for a Chevy: each vehicle has its own approximate value in dollars estimated by Kelly Blue Book, but they don’t quite match, and nothing is exact. As with all ambiguity in taxable value, the best practice is to be consistent in your valuation method. Haynie & Company has an enormous database of spot pricing that uses a weighted-average method to value virtual assets on a given date and time.
Governments have used digital currencies for decades. Any sort of government-backed currency is called “fiat” currency. While government-backed digital currencies aren’t new, “virtual” currencies typically refer to money that isn’t backed by the government (aka non-fiat currency). Virtual currency has a much broader definition than just cryptocurrencies like Bitcoin. If you’ve been following Facebook’s attempt to get regulatory support for its Libra coin, then you’ve probably heard arguments that it isn’t a true cryptocurrency because of its centralized nature. Crypto purists argue that Libra is a virtual currency, but not a cryptocurrency. The argument highlights the trouble with regulating virtual currencies: they come in all shapes and sizes and no two are the same. The term “virtual currency” could be construed to include things like loyalty points at your favorite restaurant, credits for stock photos or gaming tokens on mobile phone apps. It’s hard to put a clear limit on the definition of virtual currency, but cryptocurrencies like Bitcoin and Ethereum certainly fall under the IRS’s definition of virtual currencies.
Getting Paid/Paying Employees in Crypto
If you’ve been using crypto coins as payment for work, the same rules apply for crypto as for fiat payments. The only difference is that you’re responsible to determine the FMV of the payments before calculating withholdings and taxes. If you would have been subject to payroll withholdings or self-employment tax on US Dollars, then you’re still responsible for the withholdings and self-employment tax on crypto payments. Talk to your tax advisor about establishing consistent methods for determining the fair market value of your payments.
Buying Things with Crypto
Imagine trying to buy a cup of coffee using Apple stock instead of dollars and cents. That’s essentially the transaction that takes place when you use Bitcoin to make a purchase. Whether it’s a coffee or a Tesla, each purchase is a taxable event and you need to calculate and record the fair market value of the crypto you used at the time you made the purchase. Every store calculates the FMV differently and each payment card records transactions differently. Correlating the transactions with your tax records is an onerous task that is made infinitely easier with the help of your Haynie tax advisor.
We are Here to Help!
Virtual currencies grow and change so fast that it can be a full-time job just keeping up! Let us help you focus on what you do best. We are committed to staying on the cutting edge of technology and helping you manage your tax liability to meet your long-term goals. Please contact Haynie & Company for assistance.
About Scott Frederickson
Scott S. Frederickson is a Partner with Haynie & Company, overseeing the Private Family Office division. He specializes in strategic planning for High Net Worth Families, overseeing their complex investments, trusts, and businesses. Scott serves alongside family Attorneys, Financial Advisors, and Bankers as a vital business advisor for his clients.