Bitcoin Tax Question

Question

I have three scenarios that I have a question about related to bitcoin, the IRS< and taxes. I tried asking the finance types, but they didn't seem to really understand bitcoin and cryptocurrencies, especially on the latter two questions below this and I think this is a more appropriate community to ask since this is in your realm of expertise.

1. I buy a product with bitcoin. The IRS only cares about the US dollar cost-basis for the purchase; that's it. From this question, I file this on a 1040 Schedule D form. For institution, do I list companies like Coinbase, BTCPop, and Magnr if these are the accounts where I sent money for a purchase? What about if it's a wallet that I privately own?

2. I have several savings accounts that earn bitcoin on bitcoin (Magnr, BTCPop, exchange lending, etc) and I do not convert earned bitcoin back to US dollars (for now). I do keep records of the total earned bitcoins for the accounts, but those are still in bitcoin. Since this hasn't been converted to US dollars or any other fiat, what is owed on taxes at what cost basis, or do I wait until I convert these gains to US dollars?

Example: I earn 5 bitcoin on 100 bitcoins saved at BTCPop, but since I haven't sold those 5 bitcoins, there isn't an official US dollar cost basis that I'm aware of. How are these 5 bitcoins taxed, or are they taxed when I finally sell them to US dollars or other fiat?

3. I buy a bitcoin at $400. I take that bitcoin and swap it for Monero at $4. I had 1 bitcoin that I swapped for 100 Monero. Do I owe taxes when I swap from bitcoin to Monero, or when I swap back to US dollars or another form of fiat?

Thanks everyone.

Answer 1

I have several savings accounts that earn bitcoin on bitcoin (Magnr, BTCPop, exchange lending, etc) and I do not convert earned bitcoin back to US dollars (for now). I do keep records of the total earned bitcoins for the accounts, but those are still in bitcoin. Since this hasn't been converted to US dollars or any other fiat, what is owed on taxes at what cost basis, or do I wait until I convert these gains to US dollars?

The cost basis is zero since there was no cost for you to acquire the bitcoins. It's just like interest. You have ordinary income equal to the fair market value of the bitcoins at the time you acquire them. When/if you sell them, your basis is also the fair market value at the time you acquired them.

Example: I earn 5 bitcoin on 100 bitcoins saved at BTCPop, but since I haven't sold those 5 bitcoins, there isn't an official US dollar cost basis that I'm aware of. How are these 5 bitcoins taxed, or are they taxed when I finally sell them to US dollars or other fiat?

They are taxed based on their fair market value, just like any other income. The amount you paid taxes on becomes your basis.

I buy a bitcoin at $400. I take that bitcoin and swap it for Monero at $4. I had 1 bitcoin that I swapped for 100 Monero. Do I owe taxes when I swap from bitcoin to Monero, or when I swap back to US dollars or another form of fiat?

You owe taxes on that trade if you had a gain. If you bought the bitcoin for $400 then that's your basis. If the Monero is worth, say, $1,000, then you have a taxable gain of $600. Your basis in the Monero would then be $1,000.