Virtual Currency Question

[Uncle Sam]

I have a client who during 2020 did virtual currency transactions. It was NOT for any investment or trading purposes. This is the only virtual currency client this tax season.
What he did was, wire a friend of his who was living in another country funds to live on. He purchased the virtual currency with $ and the friend cashed virtual currency into the foreign currency. There was a nominal bank fee for the conversion so she got slightly less than what he wired.
It was numerous transactions spread out throughout the year not exceeding the gift tax annual exclusion.
My question is - how do I answer the question on 1040 form and what must I do in addition to that?

[New York Enrolled Agent]

I have a client who during 2020 did virtual currency transactions. It was NOT for any investment or trading purposes. This is the only virtual currency client this tax season.
What he did was, wire a friend of his who was living in another country funds to live on. He purchased the virtual currency with $ and the friend cashed virtual currency into the foreign currency. There was a nominal bank fee for the conversion so she got slightly less than what he wired.
It was numerous transactions spread out throughout the year not exceeding the gift tax annual exclusion.
My question is - how do I answer the question on 1040 form and what must I do in addition to that?

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

It sure seems obvious to me how you answer the question.

[Uncle Sam]

Since you provided a response to the first part of the question - how about answering the 2nd part?
FAQ#5 doesn't discuss the whole issue. There was no business or investment or financial interest motive involved other than
to transfer to a 3rd party. No gift tax consequences.

[Anarchrist]

It sure seems obvious to me how you answer the question.

Obvious to anyone with half a brain. Not so obvious to the irs since they currently say (contrary to the form instructions) if you buy virtual currency in 2020 and hold it, the answer is "no".

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions#collapseCollapsible1614795059569

Q5. The 2020 Form 1040 asks whether at any time during 2020, I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. During 2020, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Must I answer yes to the Form 1040 question? (3/2/2021)

A5. No. If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.

how about answering the 2nd part?

Put the transactions on 8949 to report the gain or loss.

[Rapid Robert]

In the future I would just stick to using Paypal, which does support transactions using foreign currencies.

It was NOT for any investment or trading purposes.

Now this raises an interesting question. As we know, there are only four possible uses of property for tax purposes: personal use, business use, investment use, or stock-in-trade (inventory). IRS says cryptocurrency (which I'll abbreviate to "crypto", even though that word used to mean something else) is property, so it must fall into one of those categories.

Normally, crypto would be considered investment use, just like stocks and bonds. I would argue it is always by definition investment use, meaning both gains and losses factor into the taxes owed. Someone on another forum took the position that it is possible for crypto to be personal use, meaning losses are not deductible. So for example, if you have crypto but only use it to buy coffee at Starbucks (or send money to someone in a foreign country), that position would not allow any losses to be deducted. That would be like saying that if I give someone a share of stock or a collectible coin or piece of artwork with FMV $100 to purchase an item of furniture for my home, and I paid $125 for that stock/coin/artwork, I would not be able to deduct the $25 capital loss.

So the question is, is crypto ever considered personal-use property, and if so, is it determined on a transaction by transaction basis, or does one "personal use" of your crypto contaminate your entire holding and make it all personal use? What if I convert my crypto first to cash and then immediately use the cash to make a personal puchase, does that fall back into the investment use category?

[Scarecrow]

So the question is, is crypto ever considered personal-use property, and if so, is it determined on a transaction by transaction basis, or does one "personal use" of your crypto contaminate your entire holding and make it all personal use? What if I convert my crypto first to cash and then immediately use the cash to make a personal puchase, does that fall back into the investment use category?

TTB Occupations and Oddities, page 14-2 says: "For federal income tax reporting purposes, virtual currency used to purchase goods or services is treated as property. When virtual currency is used to purchase a product or service, gain or loss is the difference between the fair market value of the product or service and the cost basis in the virtual currency that is exchanged for that product or service. In contrast when a product or service is purchased with a U.S. dollar, there is no gain or loss because the tax basis of the U.S. dollar is its face value."

Thus, there can be no personal use of virtual currency, because virtual currency is itself property. It would be like trading your personal use coffee maker for a personal use toaster. If the fair market value of the toaster you received is greater than the adjusted basis of the coffee maker you traded, then there is a taxable gain on the trade, even though both objects are personal use objects.

[Burke]

Since the IRS considers it "property" (as opposed to cash) and allows capital gains/losses, requiring it to be reported on Sche D, I would label it always investment property as you state in the 2nd paragraph. So, no, it is not considered personal-use for tax purposes.

[RWG1950]

The yes or no virtual currency question on the 1040 is one thing, but a larger issue may apply here.
How do you know whether the structuring of his multiple foreign transfers is innocent or if it
involves a money laundering scheme, possibly used to fund terrorist activities ?
Tread carefully.

[Rapid Robert]

How do you know whether the structuring of his multiple foreign transfers is innocent or if it
involves a money laundering scheme, possibly used to fund terrorist activities ?

That is one reason why I suggested just using Paypal to send money to someone outside the U.S.

Interesting thing about Paypal, they are on the alert for payments made indirectly. For example, I know of a payment made to one person (in dollars to a U.S. citizen with a Paypal account), but in the memo field of the transaction, it mentioned that the payment was related to a different person and that person's name (only) was mentioned, for example "reimbursement for gift card sent to John Doe".

I normally think that a memo field would not be of interest to Paypal, but after this type of transaction happened several times, they suddenly put a hold on the transaction and required that the birthdate of John Doe be provided before they would complete the transaction. But, both the person making the payment and the person receiving the payment did not know John Doe's birthdate, and had no reason to know it, and could not provide it. Remember, John Doe was merely mentioned in the MEMO field. After 30 days, per standard Paypal policy, the transaction was canceled. In the end, a paper check was mailed instead, but I found it interesting that Paypal is parsing the info in memo fields looking for names and trying to identify the person(s) so named.

[Uncle Sam]

I don't know how one can automatically assume there was fraud unless the subject was addressed in the original post.
This particular client has been my client for over 30 years, is a veteran, a retired person, and wanted to help a friend out in who was then living in a foreign country and
chose to use virtual currency as the mechanism to wire that person funds because to do it another way - would have been too costly to facilitate. He's not looking for any tax writeoff
associated with these transactions or any benefits. The fees/costs associated with the transaction he absorbs.

[TAXNJ]

It was numerous transactions spread out throughout the year not exceeding the gift tax annual exclusion.
My question is - how do I answer the question on 1040 form and what must I do in addition to that?

Yes, and as you mentioned it was a gift. Don’t see how it be reported on a form 8949 if it was a gift.

Should be a done issue.

[Rapid Robert]

Don’t see how it be reported on a form 8949 if it was a gift.

That depends on who converted the crypto to currency. My cursory understanding is that crypto can be transferred via transaction recorded in the blockchain ledger, or also simply bought/sold via a 3rd party exchange.

[Burke]

You would still answer the question Yes.

[TAXNJ]

You would still answer the question Yes.

Agree. As the Original Poster stated:

.....What he did was, wire a friend of his who was living in another country funds to live on. He purchased the virtual currency with $ and the friend cashed virtual currency into the foreign currency. There was a nominal bank fee for the conversion so she got slightly less than what he wired. It was numerous transactions spread out throughout the year not exceeding the gift tax annual exclusion.....

Don’t see how it be reported on a form 8949 if it was a gift.

So should be a done issue.