My Convo with a H&R Block Rep on How Bitcoin is Classified and Taxed, by the US Government:
October 2017 Kristin B: Hi, my name is Kristin B. How may I help you? Me: Hi Kristin. I have some investments in cryptocurrency, and I have questions about how taxes apply to them. Kristin B: What are your questions? Me:I called the IRS, but can't get through to a rep. I also googled the info, but what I came up with isn't as reliable, or understandable, so I'm hoping you guys can help clear it up a bit: Me:How is cryptocurrency defined in the tax code? What type of assets are considered “property” and why? How is crypto taxed for retailers that accept it as payment for goods and services? How is crypto taxed if I use it as a medium of exchange; to make purchases? How is crypto taxed if I use it as an investment, held long or short term? What are the main differences in how cryptocurrency is taxed, vs investments in fiat currency? Kristin B: Virtual currency is treated as property for U.S. federal tax purposes. The general principles that apply to property transactions apply to transactions using virtual currency. Me:What are those general principals? Kristin B: For example, wages paid to employees using virtual currency are taxable to the employee, must be reported by an empoyer on a Form W-2, and are subject to federal income tax withholding and payroll taxes. Kristin B: Payments to independent contractors by virtual currency are similar. Kristin B: The self-employment tax rules apply and payers must issue form 1099. Me:So are wages in fiat currency usually considered "property" as well? What else is usually considered "property"? Kristin B: Yes, it is. Kristin B: There is a Notice 2014-21 provided by the IRS that has frequently asked questions and answers. You may want to take a look at it. I think this notice will answer your questions. It is found at https://www.irs.gov/pub/irs-drop/n-14-21.pdf Me:That is very helpful, thank you! I'm still trying to get a frame of reference as to what else is usually considered property? Kristin B: Re your last three questions, Q-7 and A-7 discusses the character of the gain when you use the virtual currency to buy and sell goods. For example, things like stocks, bonds, and other investment property are capital assets, so if you receive virtual currency from selling these items, you will be taxed on the capital gains/loss. Kristin B: The normal gain or loss recognition rules apply to the virtual currency. Kristin B: The IRS sites their Publication 544 to determine the character of the gain or sale based on the type of property (capital asset/ non-capital asset). These are the normal rules that you would apply to the virtual currency. Kristin B: https://www.irs.gov/pub/irs-pdf/p544.pdf Kristin B: The virtual currency is considered property as wells as what you buy and sell with it. Me:Ahhh. Also helpful. So in your example, are stocks, bonds also considered property? Is there a list of what all is considered "property" in the US tax code? I believe this is where a lot of my hang-up is. That word is starting to sound like it encompasses any taxable asset- wages, stocks, bonds, real estate. Is the USD considered property, as well? There is a huge debate in the crypto community as to whether or not it is considered a valid currency, so I think the best way to clear that up is to find out how its treatment differs from how the USD is treated, in US tax code. Kristin B: Right. Kristin B: I will do some research Me:Should I stay in the chat, or would you prefer to email the response? Kristin B: Please stay as I think this will be quick. In the tax code property is defined as any matter or thing capable of private ownership. Kristin B: The IRS determines how a sale or exchange or property is taxed based on its character. Me:WOW! That gives a lot of wiggle room for Uncle Sam. Kristin B: That is true. Pretty much everything is property. Kristin B: On a sale or exchange you will have either ordinary gains/losses or capital gains/losses. Me:Lol. Well ok then. Any insights on major differences in how digital currencies are handled differently than USD, in US tax code? If any. Kristin B: And then you must classify your capital gains or losses as either short-term or long-term. The Irs Pub 544 defines capital asses on page 22. Kristin B: Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Kristin B: You will have a short-term capital gain or loss if you hold the property 1 year or less. Kristin B: You will have a long-term capital gain or loss if you hold the property more than 1 year. Kristin B: That Irs notice reads that the IRS treats the virtual currency as property. Kristin B: Does this answer your questions? Kristin B: What is property for the normal tax rules is property when you involve virtual currency. Me:Sorry for the delay, my Chihuahua had to go outside to potty. Kristin B: No worries Me:It's all getting MUCH clearer. Kristin B: Great. Me:Lastly, I'm still curious as to how digital currencies are handled differently than USD, in US tax code? If any. Kristin B: They are handled the same as far as the Tax Code goes. Kristin B: Virtual currency is considered property, just like the USD. Me:Well. You are officially my Tax Angel Genius! Thanks Kristin B. I'll be sure to use this chat when preparing my 2017 return, and share the resources with some of my crypto friends. Kristin B: Terrific, thank you. It has been a pleasure assisting you today and thanks for choosing H&R Block. Goodbye Me:Bye :) Kristin B has disconnected.
BA in Economics. BS in Finance. Hostess of the Crypt Keepers’ Club. Passionate about research and data. I don’t fold sheets, I spread them.
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