I tend to get asked a lot of questions about people's individual circumstances when it comes to their investments in cryptocurrency.
I am combining some of those questions here. If you think this is helpful, please let me know and I'll go ahead and make this something I do more often.
As always, if you have any questions about U.S. tax law and cryptocurrency, feel free to ask them below. Try to be somewhat general, while I do my best to answer each question correctly, I can't provide you with any guarantees without knowing a lot about your individual circumstances.
1
?: So there was this guy years ago who made insane profits out of BTC, reinvested those profits in shitcoins, lost most of them, but then had no money to pay the IRS the tax of the profits he made, because those profits were long gone. If I understood correctly, assuming the guy made over 100k in profits and pretty much lost all of them, he would be screwed, right?
A: If you had insane profits in 2011, but then managed to lose all of your money in 2012... then yeah, I believe you would be out of luck. Edit: That being said, you would be able to use those losses in 2012, and carryover the excess to future years. With enough time, you would 'recoup' the money paid out to the IRS.
If he sold his BTC in 2011, reinvested all of his money, and lost it all in 2011, then I would think he'd be able to offset his BTC gains with the losses in his other coins. You are able to offset your long-term gains with short-term losses.
2
?: Can you clarify how staking is treated in the US? Those weekly rewards are a pain to track. Is there an easier way to track and report them, or do we have to record every single one individually and treat it like income?
Also, I don't know if you are familiar with the Moon rewards we get here. It's an ERC 20 token, but still on testnet. We have our own wallet we control where we receive our reward. You can swap them for xMoons which you can then trade for nano or dai of actual value. This makes it a little more tricky to determine fair market price. But there is a market price for xMoon on coingeko. It is a 1:1 swap for moon. Would they work like airdrops and income, when r/cc distributes them to us every month?
A: I have not looked too much into the tax consequences of staking (it has been added to my list). If I had to make an assumption: staking is akin to mining or interest, and taxed on receipt.
This is where the exchange, or whatever you're using to stake should come in and provide a summary with the various conversion rates throughout the year. Trying to track this yourself will be difficult.
As for moons, I would think the best idea is to use the conversion rate of xMoon on Coingecko and record it as income when the distribution occurs.
? #2: Not (other user), but just trying to get the Moon part straight and what I should be recording. I work better with concrete examples, so bear with me. To keep the numbers simple, say I receive 2,000 moons in January when they're $0.05 each on CoinGecko. It seems I should record this as $100 income, correct?
In February, I decide to sell 500 of those moons, which are now worth $ 0.10 each. Since the original value of those 500 moons was $ 25 (500*$ 0.05) and the February value is $ 50 (500*$0.10), I should record a short term capital gain of $25, right?
I guess it gets a little more complicated because the true path to Moon-->USD conversion is Moon-->xMoon-->xDAI--->DAI-->USD. What do we need to report on here?
A #2: Nothing wrong with concrete examples, they tend to make answering the question a little bit easier.
You receive 2,000 Moons in January. They are currently worth $0.05 each. You would record $100 of income.
You sell 500 of your Moons, for $0.10 each. Your original basis in the Moons is $25. You sold them for $50. You would record a short term capital gain of $25. (This would be reduced by any transaction fee, if any, when you made the sale.)
For your last question: I would think the correct treatment is mentioning each individual exchange, but I'm leaning towards saying that simply inputting "500 Moons" for the description of the property (Form 8949), and then proceeds of $50 would suffice. I could see it being worth mentioning the other conversions if they impact your basis by a meaningful amount. Mentioning three in-between conversions seems to be a little excessive for what I assume are ultimately pennies in this case.
3
?: Regarding staking, with ethereum proof of stake which began in December 2020, the ether that was staked is locked for 1.5 to 2 years and likewise so are the rewards earned from staking. Since the rewards are locked, we don't have possession of them, are the earned rewards taxable income? I read comments about not having "dominion" on the rewards and it may not be taxable? Others say it is taxable. Any insight into this scenario would great.
A: Individuals are generally cash basis tax payers, so income is recorded when it constructively received.
In the case of staking ETH, where you do not have access to the staked rewards, I would think that you do not record any taxable income until you are able to utilize it.
This was covered in this specific revenue guidance issued by the IRS: https://www.irs.gov/pub/irs-drop/rr-19-24.pdf
4
?: I bought coins and did crazy back and forth trades on binance, kucoin, and others in 2017 until the Jan 2018 crash - and haven't touched it until this last week.
I don't even know what other exchanges I even traded on and how to begin to track this from these days.
If I want to somehow make this right, considering that I now have some funds coming back up, whats the best approach? I'm assuming I need to somehow... fix 2017/2018?
Another question: If I added $100 on one date, added another $100 a month later that had different value, how does all of this add up at the end of the day?
$200 USD that had X value of BTC at two different times that was sold.... how does that gain/loss calculate?
A: When it comes to prior years, you are able to file amended returns (Form 1040X). I believe your best bet is going onto the exchanges you can still access, and seeing if you can pull transaction records from those years. Contacting support might also be helpful.
Let's pretend you bought .5 BTC for $100 on 01/01, and then 1 BTC for $100 on 02/01.
If you sold 1.5 BTC for $ 400, you would simply recognize a gain of $ 200. ($400 amount realized minus $200 of basis)
Where it can get interesting is: the IRS allows you to use specific identification, so you can decide which BTC you are selling. Let's pretend you only sold .25 BTC for $100. You can then say "Oh, this .25 BTC was purchased on 01/01, so I have a gain of $50." or "Oh, this .25 BTC was purchased on 02/01, so I have a gain of $25."
This material, and any responses below, have been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment, or accounting advice. You should consult your own tax, legal, investment, or accounting advisors before engaging in any transaction.
US Tax Law and Cryptocurrency:
- Part 1: The Basics on LeoFinance and Reddit.
- Part 2: Tax Loss Harvesting and Wash Sales on on LeoFinance and Reddit.
- Part 3: Cost Basis Accounting (FIFO, LIFO, HIFO, and Specific Identification) on LeoFinance and Reddit.
- Part 4: Gift Taxes on LeoFinance and Reddit.