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Bit coin reporting requirement


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I didn't know that a village (playa el Zonte) in El Salvador was a bitcoin location for a few years. They even have an ATM for bit coins. It is very interesting to see how people, who didn't know how to read or write, were using their cell phones to pay for pupusas and other daily purchases.  If I prepare the taxes for a person who has been buying these little items with bit coins, do I have to file Schedule D?

If you have purchased bit coin or other crypto currency, do you suggest any potential crypto that could be a good investment?

 

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If your client does anything else other than purchasing cryptocurrency with real currency, then you're filing Schedule D for "spending" of any kind, including one type of coin for another type of coin, buying things, etc.

&/or, your client has Other Income for earning cryptocurrency by any means other than purchasing with real currency, including mining, earning rewards for watching videos or tying up their crypto for a time period, or awards for just being on a particular platform at a particular time.

I have one young client who purchased crypto with US$ during 2020, but she "earned" partial coins in her account during 2021. She hasn't spent or transferred or...any coins yet. I had "the talk" with her about tracking her coins or using a software program to track for her. So far, her coins are on Coinbase which does offer a free tracking service up to a certain amount and then charges.

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Lion EA,

I think we still have to report it.  Let's say I filed my taxes and I paid taxes on $20K. I take $10 of my after taxes money and buy bitcoin. In December, my bitcoin value is $160K and I buy a Mercedes, buy a plane ticket, rent a hotel and purchase meals on my trip... all with bitcoins. I will have to report that $150K, correct?

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Yes, as I said, if you use Crypto, you have to report it. You have a Schedule D sale proceeds, in your scenario $160,000. You have the $10,000 basis, that I think you meant. But depending on how/when you bought the coins and how/when you "sold" them, you might have several lines to report instead of just one on Form 8949.

If you didn't go on your buying spree until January, you wouldn't have anything to report on the current year return.

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Yes, it all goes on Sch D.  You can do one-line summary for the totals of short term and long term (but make sure the client uses a tracking program of SOME kind - before those were available, for one client I had a spreadsheet.  FIFO, and every bleeping Sbux coffee was tracked.  Ugh.).

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And, all those 'earned' bits go on Other Income (what is it now?) Schedule 1 line 8 or something.

Can we really do one-line summaries on Sch D with non-covered stuff like Crypto?

Just wait until Congress/IRS/whoever decides that wash sales apply to Crypto!

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I would stick to Sch D and the 8949 series which feeds it. 

Hard to deal with this, but even paying for a $50 fillup with gasoline to a service station which accepts Bitcoin constitutes a separate transaction.  Hope there are reporting alternatives to reporting every single transaction.

And how is your crypto "portfolio" valued?  We get back to the ancient inventory lessons of FIFO, LIFO, Moving Average.  If a method chosen is other than Moving Average, a nightmare results because of multiple tiers of valuation.  Especially with LIFO.

Dealing with this is a nightmare to begin with.  No need to make it worse with LIFO or FIFO. 

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This is not inventory, its an investment so it's just like buying and selling stocks,bonds, mutual funds or ETFs,

except that you can that you can buy something directly thus skipping the intermediate step of selling for cash then buying something.

Perhaps in that sense it's kind of like bartering.

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I've been dealing with crypto for years because I have a client who is a miner.  I had to study it, was fascinated, and now I follow it (would never buy it).  By now a few other clients are buying/selling various coins, so I'm able to handle them.  I will back out if any one of them ever starts buying everyday items with crypto as the constantly changing price would be impossible to trace.  Few actually use it as currency, and I don't know why any merchant would accept it.  Say someone buys a Tesla for $80k, but by the time the transaction clears (up to 20 minutes for bitcoin), the value of the crypto could have gone down by $5k or more (or up).  I read about a guy who ordered a pizza and by the time the transaction cleared it cost him $23 more.  The exchanges are going to have to do the tracking (like Coinbase does) because otherwise the taxpayer and tax pro and IRS will never be able to figure it out.  It would mean a five day audit for a $20 transaction.

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