Bitcoin has been in the news since it emerged in 2009. It can be described as a peer-to-peer cryptocurrency not dependent on any country’s currency system. Bitcoin and other digital currencies have grown in recent years, and Bitcoin has recently had a big jump in value. Using Bitcoins in lieu of dollars or euros may be attractive, but are there tax issues for American taxpayers? San Francisco tax lawyer Rob Wood talks about possible traps for Bitcoin users in this interview. He also discussed some of the issues in a Forbes article, “IRS Could Tax Loans of Bitcoins, Other Cryptocurrencies.”
Wood points out that the IRS has taken a position on the nature Bitcoins and other “virtual currencies.” The IRS announced in 2014 that cryptocurrencies would be treated as property for tax purposes. For example, if someone receives Bitcoins in payment for something, the Bitcoins would be viewed as property, and the value of the property would be its fair market value on the date of receipt. This is what would be reported on a tax return.
The more difficult issue, Wood says, relates to someone who is paying for something with Bitcoins. That person is, in the view of the IRS, transferring property. The payor has a tax basis in that property and could have a gain or loss as a result of the payment.
Wood adds that the IRS has not yet addressed this issue. As a consequence, some Bitcoin users have been trying to work it out for themselves as they went along. However, because cryptocurrency is property, gain or loss may be involved in a transaction, and a user of Bitcoin may have to file a Form 1099 to report the payment. No information is available as to the level of compliance by Bitcoin users.
There are also issues regarding loans, the subject of Wood’s article cited above. “Truthfully,” Wood says, “I don’t know the answer. I can tell you what I think.” Wood thinks that a loan of cryptocurrency could be viewed, at least in some circumstances, as a loan of property. This differs from a traditional loan of money, where there is no income to either side. The only reportable income could arise from interest. With Bitcoins, the borrower would likely treat the cryptocurrency as fungibles and might repay the loan with other Bitcoins or even a different cryptocurrency.
Wood believes that a lot of people are making loans of Bitcoins and assuming that the cryptocurrency is like real currency. Wood says that there is danger in making that assumption. He believes that people lending and borrowing Bitcoins should be aware that the IRS might treat a Bitcoin loan as a property transaction with possible gain and loss. The way to guard against the problem might lie in how a transaction is described in loan documents. “Emphasize that the transaction is intended to be a loan, not a sale or disposition.”
As for Bitcoin investors, Wood recommends that people should think carefully about what they are doing and what they are reporting on their tax returns. The IRS may start looking at Bitcoin transactions as a source of additional tax revenue and will start inspecting these transactions more diligently.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.