published March, 2018
OK, you’re hip, you’re modern, you’re buying and selling cryptocurrencies.
Those aren’t traceable, so they’re not taxable, right?
The IRS has determined that cryptocurrency is “property” (IRS Notice 2014-21), and when you exchange out of one currency into something else, you may have a reportable gain or loss.
Let’s say you bought 12 bitcoin on 1/1/17 and paid US$800 per bitcoin (US$9,600). Then you got all excited and sold (good for you!) on 12/15/17, at the peak of US$17,900 (x12 = US$214,800). And, with your $200k, you bought XRP for US$0.861760, or 249,257 on the same day.
Time passes, and you decide to buy a house, so you sell your XRP 249,257 on 3/24/18 and since the value has declined, you convert it back to US$161,073 so you can pay the down payment. You’re still doing really well, you made US$9,600 into US$161k. You expect to pay tax on $151k, the difference.
But, one currency into another is NOT a “tax free exchange” so there are two reportable transactions here. First you’ve got a taxable gain on the bitcoin in 2017 of $205,200. Then, you’ve got a loss on XRP of US$53,727. Because they are in separate calendar years, they do not “net” against each other. You owe tax on the US$205k for 2017, and then you have a capital loss in 2018 of US$53k, which you can take against other income at $3,000/year (unless you have a future capital gain to offset it).
Each time you sell, you have something to report. You need to track when and what you bought, and what and when you sold for, and report this on your taxes.
How will they catch me? Coinbase, the exchange service, will be reporting your transactions to the IRS, and I expect any other reputable exchange to do the same.
Well, what if I pay my contractor with XRP instead of dollars? If you were going to have to report to the IRS if you’d paid with US$, you still have to report at the exchange rate the day you paid (think 1099s denominated in US$).
(Thanks to Peter Schiff for the example.)