Pay Me In Bitcoin

 

He plays right guard for the Carolina Panthers and had a great quote about cryptocurrency:

         "Pay me in Bitcoin.”

We are talking about Russell Okung.

I believe he earned about $13 million for the 2020/2021 season, so he can move a lot of Bitcoin.

And Bitcoin had quite the run in 2020, moving from approximately $7,200 in January to $30,000 by year-end. The payment platform company Square added Bitcoin as an investment, and PayPal started a new service allowing its users to buy, hold and sell Bitcoin through their PayPal account.

Then there is, as always, the near inexplicable behavior of some people. In October, John McAfee (yes, John of McAfee computer security products) was arraigned for tax fraud. He was charged with, among other things, not reporting income for his work promoting cryptocurrencies.

The IRS is paying more attention.

We have existing guidance that the IRS views cryptos – which include Bitcoin and Ethereum – as property and not currency. While this might sound like an arcane topic for a business school seminar, it does have day-day-day consequences. If you buy something for $11 and pay with a $20 bill, there is likely no tax consequence.  A crypto is not currency, however. Pay for that $11 purchase using your Bitcoin and the IRS sees the trading of property.

What does that mean?

Taxwise you sold crypto for $11. You next have to determine your cost (that is, “basis”) in the crypto. If less than $11, you have a capital gain. If more than $11, you have a capital loss. The gain or loss could be long-term if you held the crypto for more than one year; otherwise, it would be a short-term gain or loss.

Assume that you have frequent transactions in crypto. How are you to determine your basis and holding period every time you pay with crypto?

You had better buy software to do this, or use a wallet that tracks it for you. Otherwise you could have a tax mess on your hands at the end of the year.

You can, by the way, also have ordinary taxable income (rather than capital gain) from cryptos. How? Say that you do consulting work for someone and they pay you in crypto.  You have gig income; gig income is ordinary income; that crypto is ordinary income to you.

By the way, mining Bitcoin is also ordinary income.

The IRS had a question about cryptos on a schedule in prior years, but for 2020 it is moving the following question to the top of Form 1040 page 1:

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

The IRS moved the question to make it prominent, of course, but there is another reason. Remember that you are signing that tax return “to the best of your knowledge and belief” and “under penalties of perjury.” The IRS is raising the stakes for not reporting.

Expect more computer matching. Expect more notices.   

Even Treasury is upping its game.

There is a form that one files with the Treasury if one owns or has authority over $10,000 or more in a foreign bank or other financial account. We tax veterans remember it as the FBAR (Foreign Bank and Financial Accounts) report, but the name has since been revised to FinCen 114 (Financial Crimes Enforcement Network). Here is Treasury telling us that we will soon be reporting cryptos on their form:

Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)).  For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency).    However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

This area is moving in one direction – more reporting. There is currently some inconsistency in how cryptocurrency exchanges report to the IRS (Form 1099-B versus 1099-K versus 1099-MISC). I expect the IRS to lean harder – and soon - on standardizing this reporting. This genie is out of the bottle.