I was reading something recently, and it reminded
me how muddled our tax Code is.
Let’s talk about cryptocurrency. I know
that there is bad odor to this topic after Sam Bankman-Fried and FTX, but
cryptocurrencies and their exchanges are likely a permanent fixture in the financial
landscape.
I admit that I think of cryptos – at least
the main ones such as Bitcoin, Ethereum or Binance Coin – as akin to publicly
traded stock. You go to www.finance.yahoo.com
, enter the ticker symbol and see Bitcoin’s trading price. If you want to buy Bitcoin,
you will need around $23 grand as I write this.
Sounds a lot like buying stock to me.
The IRS reinforced that perspective in
2014 when it explained that virtual currency is to be treated as property for
federal income tax purposes. The key here is that crypto is NOT considered a
currency. If you buy something at Lululemon, you do not have gain or loss from
the transaction. Both parties are transacting in American dollars, and there is
no gain or loss from exchanging the same currency.
COMMENT: Mind you, this is different from a business transaction involving different currencies. Say that my business buys from a Norwegian supplier, and the terms require payment in krone within 20 days. Next say that the dollar appreciates against the krone (meaning that it takes fewer dollars to purchase the same amount of krone). I bought something costing XX dollars. Had I paid for it then and there, the conversation is done. But I did not. I am paying 20 days later, and I pay XX minus Y dollars. That “Y” is a currency gain, and it is taxable.
So, what happens if crypto is considered
property rather than currency?
It would be like selling Proctor and
Gamble stock (or a piece of P&G stock) when I pay my Norwegian supplier. I
would have gain or loss. The tax Code is not concerned with the use of cash
from the sale.
Let’s substitute Bitcoin for P&G. You have
a Bitcoin-denominated wallet. On your way to work you pick-up and pay for dry
cleaning, a cup of coffee and donuts for the office. What have you done? You
just racked up more taxable trades before 9 a.m. than most people will all day,
that is what you have done.
Got it. We can analogize using crypto to trading
stock.
Let’s set up a tax trap involving crypto.
I donate Bitcoin.
The tax Code requires a qualified appraisal when donating property worth over $5,000.
I go to www.marketwatch.com.
I enter BTC-USD.
I see that it closed at $22,987 on January 27, 2023. I print out the screen shot and attach it to my tax return as substantiation for my donation.
Where is the trap?
The IRS has previously said crypto is property, not cash.
A donation of property worth over $5 grand generally requires an appraisal. Not all property, though. Publicly-traded securities do not require an appraisal.
So is Bitcoin a publicly-traded security?
Let’s see. It trades. There is an organized
market. We can look up daily prices and volumes.
Sounds publicly-traded.
Let’s look at Section 165(g)(2), however:
For purposes of this subsection, the term "security"
means-
(A) a
share of stock in a corporation;
(B) a right to subscribe for, or to receive, a share of stock in a corporation; or
(C) a bond,
debenture, note, or certificate, or other evidence of indebtedness, issued by a
corporation or by a government or political subdivision thereof, with interest
coupons or in registered form.
The IRS Office of Chief Counsel looked at
this and concluded that it could not see crypto fitting the above categories.
Crypto could therefore not be considered a
security.
As property not a security, any donation
over $5 grand would require a qualified appraisal.
There was no qualified appraisal in our
example. All I did was take a screen shot and include it with the return.
That means no charitable deduction.
I have not done a historical dive on
Section 165(g)(2), but I know top-of-mind that it has been in the Code since at
least 1986.
Do you know what did not exist in 1986?
The obvious.
Time to update the law, me thinks.
This time we were discussing CCA
202302012.
