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Lion EA
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I have a coinbase report from a young client. I'm confirming that her Buys were all purchased with US$ and not another cryptocurrency.

My question is about her Coinbase Earn which she says she received for agreeing to "lock up" her coins for a set time. She had about 8 like that, each in the $2.00 range. My understanding is that is earned income. So, if she received a little over $16 in coins, she has $16 Other Income? Not SE? Then she'll have $16 basis when she sells/uses those coins in the future?

Trying to get a handle on this all before she uses her coins for something!

Any suggestions for a tracking program for her?

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I have a client who has sunk a large sum into buying A (one) bitcoin. He advises it has appreciated handsomely and is going to buy more. Should he sell his coin at a large profit how is it to be reported on Schedule D or what. I have avoided buying any bitcoin since frankly I have no idea what exactly it is although it seems I will need to do research fairly quickly. Just the other day I read an article in which the head of JP Morgan Chase stated that it was worthless and here a client has dumped close to $50,000 into it. 

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Crypto is like any stock except that currently there are no wash sales. 

The case of locking coins and receiving income is like having your money in a CD.  Technically it is interest and it will increase basis. This is a very interesting and common subject in the next couple of year.

I understand that if I use fiat to enter the crypto world, I don't have to report anything unless I "lock" my coins or tokens to earn income or sell them. But how about this: El Salvador uses bitcoin as its money along with the dollar. Less than a month ago, I activated my Chivo wallet and it came preloaded with $30. Right now it is about $42 or a bit more. If I don't sell this coin, should I report the $30 dollar? Is that a gift from the Salvadoran Government to its inhabitants? The idea was to give $30 to every body who register to force them to use bitcoin... which most people sold for dollars at a discounted price. What if I sell the coin, should I report the $42 dollars with the assertion that my basis was 0?

 

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As a wild guess, your $30 for register is probably earned income now. Does that mean once you report it and pay taxes on it, that your basis increases by $30?

Certainly, if you sell the coin or use it to pay taxes or to buy something, it's a taxable transaction.

How do you track which coins you spend, which partial coin might be left?

And, your wallet registered in El Salvador, that's subject to FBAR, etc., right?

I'm going to take some classes this fall...

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The tax portion of crypto is and will be interesting in the near future.  

You have purchase a coin for $30K and then you need to purchase another coin for 10K to be use as gas.  Failure to have gas will mean that your "shipment" of the goods or the order will make it only halfway to its route and unless you put more gas, it will not complete. So, lets say that my coins have double. Now I have $60K and $20K.  From your $60K, you purchase another coin for $5K. The gas cost is 2K. The basis of your new coin should be $7K and you will have to pay taxes on $2.5K and 1K, correct?

What if I convert the same coin to fiat? will I pay taxes on the same amounts and have expenses for $1K?

If I get a hardware wallet, how will I depreciate that wallet?

Admin, we might need a new forum for Crypto because this will be nightmare sooner than later.

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Follow Pacun's explanation to get a grasp on crypto.  IRS regs consider crypto to be property, subject to the usual cap gain/loss rules with the exception that wash sale rules don't apply; no FBAR reporting is required either at this time.  (Not sure about a Venezuela registered account though.)

The FMV of the "rewards" is reported as other income, because the client got something of value for nothing (just like getting interest).  I'd say the Venezuela freebie is also other income (just like banks used to offer you $20 to open an account), again because you got something for nothing.

Crypto purchases are not tax reportable (just like buying stock isn't; IRS even says not to mark the box on the return if the client only bought crypto).  Sales, however, are capital transactions.   Conversion is selling one type of coin to buy another (just like selling GM stock to buy Ford stock), so it goes on Sch D.  Using a coin to pay for something is also a sale, but hardly anyone ever does that.  Moving coins from one wallet or exchange to another is not reportable, just like changing banks doesn't have any tax implications.  Just think of the coins as stock. If you buy it, nothing to report. If you sell, it goes on Sch D. 

Tell crypto clients to get the tracking software.  My clients who have it produce a filled in Sch D complete with 8949s, which I attach to the return.  Coinbase statements often don't give dates and even if they did, the prices of various cryptos change by the second so there is no way to look up FMV like you could for a stock.   The software may also account for things like "hard forks" and "airdrops" that I won't confuse you with because I'm confused!  The basic rubric, though, is treat it like a stock transaction--that should make it simpler in your mind and eliminate most of the noise.

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21 hours ago, Lion EA said:

In Pacun's example, he bought a coin with a coin. That would be a sale and a purchase, right?

Yes. This is a real life example. (OR should I say a virtual life example?)

If I purchased in Metamask $20K of LUNA coin and $10K of ETH coin.  My coins did well and LUNA is now $50K and my ETH is now $40K. I want to convert my LUNA to UFO.  By doing that I will sell my LUNA and I will sell part of my ETH because that's the gas that will push my shipment. In this case the cost the gas for my transaction is $2K. I need to recognize profit on both coins and part of that profit will be deducted as an expense. The basis on my UFO will be $60. 

Binance.us follows the same principal except that the gas comes from BNB coin or from a reduction of the coin being purchased if you don't have BNBs and it is called a "fee". 

There are also income for staking and for referring another client to the exchange.

Virtual coins are becoming a reality... embrace it!

 

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Yes, converting one coin to another is a sale of the first coin (Sch D) and a purchase of the second (no reporting), just like selling Apple stock to buy a fruit farm is a sale and a purchase.  Both sales and purchases come with fees, just like many brokerage accounts used to impose.  Brokers will usually report proceeds net of fees; Coinbase does too, but I'm not sure of other crypto exchanges.

I will never embrace crypto!  I have been fascinated by it ever since a client started mining years ago.  The boss gave that piece of the return to me and told me to figure it out.  Now I'm hooked and not only have taken several courses but follow the business news about crypto.  I would never buy one though.  Even my miner client says he can't wrap his head around non-fungible tokens (like digital "original" artwork, first-edition digital baseball cards, etc), but I don't see the difference between those and cryptocoins.  Blockchain technology can establish proof of ownership and definitely has a use (no more title searches!).  Digital coin transactions, however, are mostly the traders placing a value on essentially nothing and waiting for another trader to buy the nothing for more than they paid.  Perhaps someday they will be useful for purchases of goods and services, but not until they become less volatile.  No way will I accept $300 in bitcoin for tax prep knowing it might be worth $250 in the 10 minutes it takes to convert it to cash (of course, it could be worth $350 by then, but I'm not the gambling type).  The prolific use of crypto for ransom and money laundering taints it as well.

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