Bitcoin! (Now That I Have Your Attention, Let’s Talk Taxes)

Today, Carrie Reese authors our HM&M blog.

I was raised by a Marine and a CPA. To put it lightly, following the rules was a BIG deal growing up. Naturally, when Bitcoin (the first virtual currency) started weaving through the news in 2010, I clutched my pearls while being simultaneously positive that this information would never apply to me. At that time, virtual currency was almost exclusively used in a black market economy, trading for drugs, weapons, and other sorts of nefarious things not suitable to be mentioned in a professional blog. It was the wild, wild west of impropriety. In other words, for me, it was an instant tune-out topic. Or so I thought.

Fast forward a few years. I’ve received my CPA license, and have spent several years in public accounting. I was quite happy following all the rules (see, above). One day I received an email from a client that had unknowingly gotten in over his head with Bitcoin. He was a medical professional who had been looking to invest some of his money, and was not even the slightest bit interested in the black market trade I had heard about so long ago. He had opted to invest in virtual currency using an online exchange.

He had invested in Bitcoin at just the right time. He, like many of you, had done some research, and decided that Bitcoin would be a good investment. And you know what? He was right. Like, in the millions of dollars right. He began trading his Bitcoin for Ethereum, a little bit of Litecoin, and even some Bitcoin Cash (nope, not the same thing).

When he contacted me, he mistakenly assumed that since he had put money into the exchange, but not taken it out, that no taxable event(s) had taken place. It was my unfortunate duty to explain to him that each time he made a trade, he was subject to capital gains (or losses) on that trade. Virtual currencies, while residing in the same exchange, are not ‘all for one, one for all’. These are completely different assets. Not currencies.

For those of you interested in investing in virtual currency, you will want to be very mindful of your activity. You will want to be cognizant of a taxable event occurring when you are trading. A great way to mitigate your risks is to keep accurate records at the onset of your virtual currency endeavor. A great CPA helps, too.

Guidance from the IRS is still murky, and the last time an official notice on virtual currency was released was 2014. But be assured, the IRS reads the news. They know people are making money, and they want their piece of the pie. Regulations are already being put in place to require exchanges to share information on their users with the IRS. I expect we’ll see a lot more to come on this in the next year, but in the meantime, be careful. It’s still a little wild wild west-y out there.

Carrie J. Reese, CPA