Tag Archives: cryptocurrency

Spending Crypto For Personal Use Can Be A Tax Mistake

June 4, 2018 | By: Robert A. Green, CPA | Read it on

If a taxpayer purchases virtual currency (cryptocurrency) and spends it on personal use, the IRS requires him to calculate a capital gain or loss on each transaction. Capital gains on personal-use property are reportable and subject to tax, whereas, the IRS disallows capital losses.

The AICPA recently asked the IRS for some equitable relief by adopting a “de minimus election,” which provides a $200 threshold for excluding capital gains income on personal transactions. (See the AICPA letter and an excerpt of the de minimus rule proposal below.)

If a taxpayer acquires virtual currency as an investment, though, then all capital gains and capital losses are reportable, and the de minims rule should not apply.

The AICPA suggests the IRS apply a similar de minimus rule used for foreign currency transactions in Section 988(e)(2) (see below). The code section refers to personal purchases, not Section 162 business or Section 212 investment property. For example, if a taxpayer acquired Euros for a European vacation, the de minimus rule applies, and the taxpayer can exclude capital gains on the Euros spent if the capital gain is under $200 per transaction.

The IRS does not permit taxpayers to deduct capital losses on personal-use property, including foreign currency or virtual currency held for personal use. Taxpayers may not deduct capital losses on the sale of a private auto or a primary residence.

Examples of using crypto for personal use vs. investment property

1.    Joe purchased one Bitcoin in early 2017 for personal-use spending, and his Bitcoin rose in price substantially during the year. Joe planned on many vendors adopting Bitcoin as a means of payment. Joe’s original intention was for personal use, so a de minimus exemption should apply to him if the IRS approves that AICPA recommendation*. If Joe bought Bitcoin in 2018, he might have a capital loss, which would be non-deductible on personal-use property.

2.    Nancy invested in 10 Bitcoins in early 2017, and her intention was capital appreciation and diversification into a new asset class. She spent Bitcoin frequently during the year on personal transactions, buying goods and services wherever Bitcoin was accepted. She hoped it would be tax-free, but it’s not.

The intention of the taxpayer is critical in determining tax treatment. If the aim is for personal use, then the de minimus rule should apply to capital gains under $200, and capital losses are not deductible. If the intention is for investment, then it’s capital gains and losses. If the purpose is for business, ordinary gain or loss treatment applies.

With tax treatment hinging on category (personal use, investment, and business), it’s wise to segregate cryptocurrency into these buckets carefully. If the IRS agrees with the AICPA proposal on the de minimus exemption, declare a crypto wallet for personal use, and the rest as an investment to protect capital loss treatment on the bulk of your crypto that you don’t plan to spend.

Excerpt from the AICPA letter
4. Need for a De Minimis Election

“Overview: Some taxpayers may only have a minimal amount of virtual currency that is designated for making small purchases (such as buying coffee). Tracking the basis and FMV of the virtual currency for each of these small purchases is time consuming, burdensome, and will yield a de minimis amount of gain or loss. A binding election applicable for a specified amount of virtual currency is beneficial to taxpayers.

Currently, section 988(e)(2) allows for an exclusion of up to $200 per transaction for foreign currency exchange rate gain, if derived from personal purchase. The same exclusion should apply to virtual currencies even though they are considered property rather than foreign currency.

Suggested FAQ

Q-9: May individuals use a de minimis rule for virtual currency similar to the section 988(e)(2) exclusion of up to $200 per transaction for foreign currency exchange rate gain?

A-9: Yes. Individuals may use a de minimis rule, similar to section the 988(e)(2) exclusion, for virtual currency transactions to alleviate the burden or recordkeeping for individuals who use virtual currency as a medium of exchange. This de minimis rule allows taxpayers to exclude transactions resulting in $200 or less of gain.”

Section 988(e)(2) Exclusion for certain personal transactions

(A) nonfunctional currency is disposed of by an individual in any transaction, and

(B) such transaction is a personal transaction,

no gain shall be recognized for purposes of this subtitle by reason of changes in exchange rates after such currency was acquired by such individual and before such disposition. The preceding sentence shall not apply if the gain which would otherwise be recognized on the transaction exceeds $200.

(3) Personal transactions. For purposes of this subsection, the term “personal transaction” means any transaction entered into by an individual, except that such term shall not include any transaction to the extent that expenses properly allocable to such transaction meet the requirements of—

(A) section 162 (other than traveling expenses described in subsection (a)(2) thereof), or

(B) section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).”

(Note: Section 162 is for business, and Section 212 is for investments.)

* The IRS has made no indication that they intend to adopt all, or any, of the many excellent recommendations from the AICPA. 

Cryptocurrency Traders Owe Massive Taxes For 2017

January 1, 2018 | By: Robert A. Green, CPA | Read it on

I consulted dozens of cryptocurrency (coin) traders on taxes in December and confirmed what the media has been reporting: Coin traders made fortunes in 2017. Now that the 2017 tax-filing season is underway, these traders should gather online tax reports if available, use a coin trade accounting program, and review the latest guidance on tax treatment.

Coinbase has a new online tax report
On July 6, 2017, the IRS narrowed its summons against Coinbase, the most substantial U.S.-based coin exchange, to retrieve larger customers’ trades and other transactions to find unreported income. In late-December 2017, Coinbase added tax reporting of capital gains and losses using first in first out (FIFO). This move should undoubtedly please the IRS since there is no 1099-B issuance on coin trades.

Update Feb. 2, 2018: Coinbase issued 2017 Form 1099-Ks to “qualifying customers,” including businesses, and traders, over specific volume thresholds. (See 1099-K Tax Forms). The IRS intended 1099-K for businesses (merchants) to report Payment Card and Third Party Network Transactions. (See Understanding Your Form 1099-K.)

Capital gains and losses
If you invested in cryptocurrencies and sold, exchanged, or spent it in 2017, you have to report a capital gain or loss on each transaction, including coin-to-currency sales, coin-to-coin trades, and purchases of goods or services using a coin. Deduct coin fees and other expenses appropriately.

Some coin deals naturally generate taxable income, including coin-to-currency trades and mining income. For example, Bitcoin sold for U.S. dollars is a noticeable capital gain or loss reportable on Form 8949. Or, when a coin miner receives a coin for his work, he or she naturally recognizes business revenue based on the value of the coin.

Imputed income
The big problem for the IRS is that most other coin transactions are not evident for tax reporting, including coin-to-coin trades, hard forks (chain splits), and using a coin to purchase goods and services. The coin investor should “impute” a sales or exchange transaction to report a capital gain or loss on coin-to-coin trades and using a coin to purchase items. Many coin investors and their accountants overlook or mishandle this reporting and underpay the IRS.

The IRS labels coin “intangible property.” Coin users may call it “digital money,” but it’s not sovereign government-issued money. That’s the critical difference: Each use of money is not a taxable event. Imagine having to report a capital gain or loss every time you purchased an item or asset with cash or a credit card. That would be ridiculous.

Coin-to-currency trades
Most taxpayers comprehend that if they purchased Bitcoin in 2016 for $10,000 and sold in 2017 for $30,000, they should report a capital gain of $20,000 on their 2017 tax return form 8949. A coin position held for one year or less is considered a short-term capital gain, taxed at ordinary tax rates (up to 39.6% for 2017 and 37% for 2018). A coin position held for more than one year is considered a long-term capital gain, taxed at capital gains rates (up to 20% for 2017 and 2018).

Capital losses offset capital gains in full, and a net capital loss is limited to $3,000 against other types of income on an individual tax return. An excess capital loss is carried forward to the subsequent tax year(s), and it may not be carried back to a prior year. Some coin traders will pay massive taxes on capital gains in 2017 and get stuck with a capital loss limitation and carryover in 2018.

Coin-to-coin trades
Many coin traders actively make coin-to-coin trades like Bitcoin to Ethereum and then Ethereum to Litecoin. Currently, coin investors purchase alt coins using Bitcoin or Ethereum.

Many taxpayers and preparers delay capital gains income on coin-to-coin trades by inappropriately classifying them as Section 1031 “like-kind exchanges,” where they may defer income to the replacement position’s cost basis. While the IRS hasn’t provided guidance on this matter, I do not believe the majority of coin-to-coin trades made on coin exchanges qualify for Section 1031 transactions as they fail one or both of the two primary requirements (and both are required). First, Bitcoin may not be a like-kind property with Ethereum. Second, coin-to-coin trades executed on coin exchanges do not constitute a direct two-party exchange, and coin exchanges are likely not qualified intermediaries in a multi-party exchange.

Coin-to-coin trading reminds me of forex trading between different currency pairs. Various currencies are not like-kind property (i.e., U.S. dollars are not a like-kind property with euros). Each coin has its version of a blockchain, and the network of users has a different purpose for each coin.

I asked coin tax expert Jim Calvin, Partner of Deloitte and author of When (and If) Income is Realized from Bitcoin Chain-Splits, if he thought these trades could qualify for Section 1031 like-kind exchange treatment in 2017 and prior years.

“It is neither a simple nor single factual issue,” he said. “It is not just whether the swapped coins are like-kind property, but also whether all the other requirements of Section 1031 can be met including the use of intermediaries.”

Atomic swaps or atomic cross-chain trading started in August 2017. The new technology allows a direct two-party exchange, bypassing coin exchanges. That may meet one requirement, but the coins must also be a like-kind property for Section 1031 deferral.

Tax Cuts and Jobs Act and coin traders
Starting in 2018, the Tax Cuts and Jobs Act limits Section 1031 like-kind exchanges to real property, not for sale. Investors may not use it on artwork, collectibles, and other tangible and intangible property, including cryptocurrencies.

The Act introduced Section 199A, a 20% deduction on qualified business income (QBI) in pass-through entities, subject to thresholds, limitations, and haircuts. A trader tax status (TTS) coin trader likely does not qualify for the deduction because he or she has capital gains income, excluded from QBI. This is different from a TTS securities trader who can elect Section 475 MTM ordinary income, which is included in QBI.

Coin hard forks (chain-splits)
The IRS has not provided guidance on hard fork transactions, and tax experts and coin traders debate its tax treatment. Bitcoin had a hard fork in its blockchain on Aug. 1, 2017, dividing into two separate coins: Bitcoin and Bitcoin Cash. Each holder of a Bitcoin unit was entitled to arrange receipt of a unit of Bitcoin Cash. Some Bitcoin holders did not gain immediate access to be able to sell Bitcoin Cash, so they may feel it’s okay to defer income on the fork transaction until they obtain such access, or later sell it. Coinbase did not support Bitcoin Cash when it forked, but it did add it to accounts for rightful holders in late-2017.

It’s reasonable that coin traders should not have to report taxable income on a hard fork until the new coin is time-stamped as a ledger entry, sending the coins to new outputs in the blockchain. Facts and circumstances on hard forks vary widely. An “old fork” could die out if miners collectively switch over to the new blockchain and abandon the old coin. Bitcoin Cash successfully forked from Bitcoin; both trade at higher values today than on the fork date. Hard forks frequently happen, and their initial fair market value varies significantly across coin exchanges.

“Taxable income is realized if the owner of pre-split bitcoin exercises dominion and control over the corresponding chain-split coins, and the income realized will be equal to the value of the chain-split coins at that time,” Calvin said. “Most owners holding Bitcoin on exchanges were unable to control if and when chain-split coins were claimed, the time income was realized, and may still be unaware of the date or value to use.”

I think many Bitcoin Cash holders had dominion and control over the new coin sometime in 2017, and they should recognize ordinary income on receiving it.

Coin trade accounting programs
Coin tax reporting is complex and voluminous. Consider two coin accounting solutions: Bitcoin.Tax and CoinTracking.Info.

The IRS calls for the “specific identification” (SI) accounting method for use on sales of property, including intangible property (coin). IRS regulations for SI require “adequate identification” of lots sold on a contemporaneous basis, and I don’t think most coin traders comply with these rules.  In June 2016, the AICPA asked the IRS if coin traders could use “first in first out” (FIFO) as an alternative solution, which the IRS permits for securities. Unless you comply with SI rules, I suggest using the FIFO accounting method for coin. (See Accounting Method Impacts Crypto Income Taxes.)

Because the IRS labels coin intangible property, wash-sale loss rules likely don’t apply. TTS traders using Section 475 ordinary gain or loss on securities and/or commodities (Section 1256 contracts) may not use Section 475 on a coin since it’s not a security or a commodity in the eyes of the IRS.

How to deduct coin-trading costs
Coin traders pay various transaction costs, fees, and interest expenses in coin and currency. Be sure to convert coin expenses to U.S. dollars at the time spent. It’s critical to distinguish between tax categories — transaction costs, investment expenses, investment interest expenses, and trading business expenses — as they are all handled differently on tax returns.

Transaction fees can be deducted from sales proceeds and then added to cost basis for purchases, so reflect them on net capital gains and losses. These charges include trading costs (approximately 0.25%) paid to a coin exchange and fees paid to miners when transferring coin between addresses to get transactions into the next block.

The new tax law suspends investment expenses for 2018, but you can still deduct them as a miscellaneous itemized deduction for 2017 (if they are more than 2% of AGI). These costs include bank wire transfer fees for transferring currency to a coin exchange; loan or borrow fees paid to a coin exchange; and withdrawal fees paid to a coin exchange for removing money or coin. (It’s essential to separate loan fees vs. margin interest, as they have different tax treatment.)

Investment interest expense can be an itemized deduction, limited to investment income, with the excess carried over to the subsequent tax year. This includes interest on borrowed funds paid in coin to lender/exchange. The new tax law did not change the rules for investment interest expenses.

Trading business expenses are deducted from gross income. If the coin trader qualifies for TTS, investment expenses and investment interest expenses are deducted as business expenses on Schedule C or through an entity.

Miners deduct business expenses against revenues.

Example: Purchasing goods and services with coin
On Jan. 1, 2017, Joe bought 100 Bitcoins at a price of $998 each, for a total cost basis of $99,800. On June 1, 2017, when the price of a Bitcoin unit was $2,452, Joe used a Bitcoin to purchase a computer for $2,452. Without realizing it, Joe triggered a reportable short-term capital gain on his 2017 Form 8949. The sales proceeds are $2,452, representing the fair market value of the Bitcoin he used to purchase the computer. His cost basis for that one Bitcoin unit used is $998, so his net short-term capital gain is $1,454. If Joe uses the computer in his business, he will deduct $2,452 as an expense.

Bottom line
I suggest coin traders calculate capital gains and losses on coin transactions, including coin-to-coin trades made on exchanges, and use the FIFO accounting method. File an extension by the due date of your tax return (April 17, 2018, for individuals), and pay taxes owed for 2017 with the extension. During the additional time (file by Oct. 15, 2018), perhaps the IRS will answer our questions, including which if any coin-to-coin trades may use Section 1031 deferral in 2017. If the IRS allows it, maybe coin traders can still file that way on an original tax return filing. Consult a coin tax expert.

For more information, see Green’s 2018 Cryptocurrency Tax Guide.

If you have any questions, contact us.



October 31, 2017 | By: Robert A. Green, CPA

Selling, exchanging, or using cryptocurrency triggers capital gains and losses for traders. The IRS treats cryptocurrencies as intangible property.

The realization method applies to short-term vs. long-term capital gains and losses. Traders investing in cryptocurrencies and selling, exchanging, or spending some during the year must report a capital gain or loss on each transaction. Tax reporting includes cryptocurrency-to-fiat-currency sales, crypto-to-alt-crypto trades, and purchases of goods or services using crypto.

Some U.S. cryptocurrency exchanges issue a Form 1099-K to accounts with transactions over a certain threshold. Others give a 1099-MISC or 1099-B. The problem for the IRS is that many cryptocurrency transactions on exchanges worldwide need to be evident for tax reporting. Cryptocurrency investors should download all crypto transactions into an IRS-compliant crypto accounting program.

Wash sales do not apply to intangible property. Section 475 MTM does not apply to cryptocurrency because it’s not a security or a commodity in the eyes of the IRS. 

In most cases, crypto traders use the first-in-first-out (FIFO) accounting method. For transactions in intangible property, an investor should use the “specific identification method” that requires some special procedures. Few traders meet those requirements, so they use FIFO. See FIFO vs. Specific Identification in Chapter 4.

TCJA restricted Section 1031 like-kind exchanges to real property starting in 2018. That rules out using like-kind exchange on crypto-to-crypto trades (i.e., Bitcoin for Ethereum). Whether crypto traders could have used Section 1031 before 2018 to defer capital gains taxes is questionable. The IRS mailed tax “education” notices to thousands of crypto traders and released new FAQs about hard forks, airdrops, and other open questions. See the IRS page: Frequently Asked Questions on Virtual Currency Transactions (https://tinyurl.com/virtual-currency). 

For more information, see Green’sTraderTax Guide Chapter 3 Tax Treatment of Financial Products.

How To Report Bitcoin Cash And Avoid IRS Trouble

August 2, 2017 | By: Robert A. Green, CPA


Read it on Forbes.

In light of the Aug. 1 split of Bitcoin into two separate cryptocurrencies, Bitcoin and Bitcoin Cash, many questions remain. While the IRS has issued guidance on cryptocurrency — labeling it an “intangible asset” for investors subject to capital gains and loss treatment using the realization method — it has not issued guidance on cryptocurrency split or “fork” transactions. There are thousands of cryptocurrencies, and many formed in this type of division in the blockchain.

Tax reporting for the receipt of Bitcoin Cash
The initial market price of Bitcoin Cash was $266 per unit, which was 9.5% of the comparable Bitcoin unit price at that time of $2,801. Bitcoin holders were distributed one unit of Bitcoin Cash for each unit of Bitcoin, a separate financial instrument with a liquid market value. In the eyes of the IRS, that’s taxable income. (An alternative name for Bitcoin Cash is BCash.)

Bitcoin holders should report the receipt of Bitcoin Cash on their 2017 income tax returns. It does not qualify as dividend income on Schedule B since a cryptocurrency is not a security. It’s also not considered interest income on a debt instrument or bank deposit. I suggest reporting the value received as “Other Income” on line 21 of Form 1040 —a catchall category for income that does not fit into a standard category.

Some taxpayers might choose to use Form 8949 (Sales and Other Dispositions of Capital Assets) instead. The taxpayer reports the $266 value of Bitcoin Cash as proceeds and 9.5% of Bitcoin cost basis as Bitcoin Cash cost basis. The initial value of Bitcoin Cash was 9.5% of the Bitcoin price at that time. This alternative treatment reduces taxable income by the cost basis amount. Another benefit is capital gains use up capital loss carryovers. I question whether this method would pass muster with the IRS — Bitcoin did not decline in value by a material amount after the split, and that undermines the use of this treatment.

Constructive receipt of income
Some Bitcoin holders mishandled or skipped arranging access to Bitcoin Cash, or their exchange does not support Bitcoin Cash, making retrieval difficult or impossible after Aug. 1, 2017. These taxpayers may believe they don’t have to report the Bitcoin Cash as taxable income since they don’t currently have access to it. While that seems reasonable, the IRS could apply the constructive receipt of income doctrine to argue the Bitcoin holder had access to Bitcoin Cash but turned his or her back on receiving it. Kelly Phillips Erb of Forbes goes into more detail in her article, Bitcoin Shift Could Cause Tax Headaches For Some Users).

Tax reporting for the sale of Bitcoin Cash
If you sold your Bitcoin Cash, you need to use capital gains treatment on Form 8949. For proceeds, enter the selling price. For cost basis, enter the $266 Bitcoin Cash value received per unit as you previously reported it as Other Income on line 21 of your 2017 Form 1040. The holding period for these units of Bitcoin Cash started on Aug. 1, 2017.

A cryptocurrency split is not a tax-free exchange
Taxpayers may feel a cryptocurrency split such as Bitcoin Cash qualifies as a tax-free exchange. I don’t think it does because cryptocurrencies are not securities, where tax-free splits are possible.

“Receipt of new Bitcoin Cash assets is a taxable event,” said tax attorney Roger D. Lorence. “Corporate taxation concepts on distributions to shareholders, dividends, spinoffs, split-offs, corporate reorganization nonrecognition events under Section 368 and allied rules, are all not applicable, as cryptocurrency is not a security. The new Bitcoin Cash assets are substantially different economically from the old Bitcoin assets.”

Lorence said the Supreme Court decision in Cottage Savings supports the view that the two classes of Bitcoin assets are not identical and therefore the transfer of the assets is considered a new class for which no nonrecognition provision of the code applies.

The IRS goes after cryptocurrency investors
Many cryptocurrency investors made a fortune the past several years selling high-flying Bitcoin and other cryptocurrencies for cash. Unfortunately, far too many of them did not report this taxable income to the IRS. Some cryptocurrency investors used Section 1031 like-kind exchange tax law to defer taxation, but that may be inappropriate (stay tuned for a blog post on that soon). Some cryptocurrency exchanges issued Form 1099-K, Payment Card and Third Party Network Transactions. The IRS feels they are insufficiently informed, so they are taking action.

Bitcoin rose in price from $13 in 2009 to more than $3,000 on June 11, 2017, and on Aug. 1, 2017, its market cap was $44 billion. Ethereum had a market cap of $21 billion. Bitcoin Cash skyrocketed overnight to a market cap of $12 billion on Aug. 2, 2017. The IRS figures hundreds of thousands of American residents did not report income from sales or exchanges of cryptocurrency and they might be able to collect several billion dollars in back taxes, penalties, and interest.

The IRS recently summoned Coinbase, one of the largest cryptocurrency exchanges, to turn over its customer lists. It later agreed to narrow the scope of the list to people with cryptocurrency transactions worth over $20,000 without a Form 1099-K. (Read IRS Blinks in Bitcoin Probe, Exempts Coinbase Transactions Under $20,000.)

Tax treatment for sales of cryptocurrencies
The IRS was slow to issue guidance for cryptocurrencies. It finally declared cryptocurrencies an “intangible asset,” not a sovereign currency, and sales and exchanges are subject to capital gain or loss treatment for investors and traders, using the realization method. (Read If You Traded Bitcoin, You Should Report Capital Gains To The IRS.)

There is tax controversy brewing with cryptocurrency investors, which means tax exams will escalate. Don’t be greedy: Pay your capital gains taxes on windfall income and amend tax returns to report capital gains before the IRS catches up with you.

Darren Neuschwander CPA, Adam Manning CPA and tax attorneys Roger D. Lorence and Mark M. Feldman contributed to this blog post.