Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.
Saturday, December 9, 2017
Bitcoin and Fred
I am going
to dedicate this post to Fred.
to talk about Bitcoin. He is a believer. He may as well be on the payroll.
I do not
want to talk about blockchain or cryptocurrencies or any of that.
about the taxation of the thing, in case Fred has gotten to you.
As I write
this Bitcoin is selling for around $15 grand.
1, 2017 – less than a year ago – it sold for around $1 grand.
There is a reason why we are still working, folks.
even Bitcoin ATMs. I understand there around 70 or so locations around Miami
alone. You can tap into one if you are going to the Orange Bowl at the end of
Mind you, if
you withdraw dollars-for-Bitcoins you probably have a tax consequence.
You see, the
IRS has said (in 2014) that Bitcoin is not a currency. Given this thing’s
propensity to swing hundreds if not thousands of dollars of day, it makes sense
that it is not a currency. Currencies are supposed to have some stable value,
at least until politicians run them into the ground.
are property, like stocks or a mutual fund. Like a stock or mutual fund, you
have a tax consequence on the sale.
the following numbers for the sake of discussion:
Bought on 1/1/17 $1,000
Cashed-in on 12/31/17 $16,500
you cash-in a Bitcoin while you are at the Orange Bowl. What have you got?
Way I see
it, you have ...
$16,500 (proceeds) - $1,000
(cost) = $15,500 gain
supposed to report $15,500 as income on your tax return.
What type of
income is it?
I see a buy.
I see a sell. I would argue this is capital gain. It would be short-term, as
you did not own it for a year.
a curve ball.
that you did some work for somebody in 2016. The paid you with that Bitcoin on
January 1, 2017 – the one worth $1,000 at the time.
your tax consequences now?
You got paid
with a Bitcoin worth $1,000. You have $1,000 of ordinary income. If you got
paid for work, it is also subject to self-employment tax.
This is what
happens when Bitcoin is considered “property” rather than “currency.” It would
be the same as you writing checks on your Fidelity or Vanguard mutual fund.
Every time you do you are selling some of your mutual fund. And it all gets
reported to the IRS at year-end.
Except that most
of Bitcoin does not get reported to the IRS at year-end. Not yet, at least. In
fact, in 2015 only 802 people reported Bitcoin on their tax return. You know
that doesn’t make sense.
Which is why
the IRS served a “John Doe” summons on Coinbase in November, 2016. Coinbase is an
exchange for virtual currencies like Bitcoin and Ethereum. A “John Doe” summons
substitutes a group or class or people for a specific person. It could be as
easy as “anyone who sold more than $600 of Bitcoin between 2013 and 2015.”
back, of course, but in the end the two wound up compromising. Coinbase will not
provide 100% of its account data, but the IRS is getting information on over
14,000 account holders and almost 9 million transactions.
other virtual currencies have become the new overseas bank accounts. It is time
to come clean on this stuff, folks.
And yes, I
believe there will be IRS reporting – akin to what the stock brokerages do – in
the near-enough future. The government is flipping the sofa cushions for every
nickel it can find. Until they get us to a 100% tax rate, they are going to keep
looking for new sofas.
probably Fred - was telling me about a Bitcoin credit card.
That is a
Say that you
bust to Starbucks in the morning. You put your coffee on the card. You stop for
fuel – on the card. You go to lunch – on the card. You stop at the dry cleaners
and Krogers on the way home – both on the card.
You have 5
“sales” that day. Each one has a cost, and who knows how we are going to come
up with that number. Say that you do something comparable almost every work
day. I will probably “fee discourage” you from using me as your tax advisor.
similar thing can occur if you accept Bitcoin as payment for your services. Say
that you are an independent contractor and two or three of your clients pay you
in Bitcoin. You are going to have to price the Bitcoin every time you get paid
with one, as your “proceeds” are its value on the day you receive it.
That is an
think of a nightmare scenario?
What if you
get paid with Bitcoin next year when it is worth $20,000. You hold onto it.
Let’s say Bitcoin drops to $9,000 by December 31, 2018. You bring me the info
for your taxes. How much do you have to report as income from that Bitcoin?
You have to
But it is
only worth $9,000 now!
Yep. That is
how it works since Bitcoin is not considered a currency.
What can I
do to get my taxes down? Should I sell it?
Now you have
a different problem. If that thing is a capital asset – and we said earlier
that it was – you will have a capital loss upon sale. You will report a $11,000
capital loss on your return.
you have capital gains to absorb those losses, you continue to have tax
problems. Capital losses are allowed to offset only $3,000 of your “other” (read:
Bitcoin) income on your tax return. You get no bang on the remaining $8,000
($11,000 - $3,000), at least until the following year when you can use another
that you are also paying self-employment taxes on that $20,000 and not on $9,000.
ridiculous. If I were you, I would fire me as your tax advisor.
I do not
accept Bitcoin for my fees, but I am waiting for someone to bring it up. I
might do it for an isolated transaction or two.