BitCoin reporting

[Snaggletooth]

I'm no doubt a year late, but this is the year I'm going to get serious about reporting BitCoin - at least with customers honest enough to tell me they own some.

I'm told that alternate currencies are to be treated as property, similar to an investment in stock. To me, this tells me that reporting should not be classified as "Other Income" but should be treated as "Capital Gains/Losses." Using a "weighted average" approach to valuing the currencies, this could create a quandry in reporting long-term versus short-term.

If you care to read further, assume the facts as follows:

10/12/20 purchases 50 bitcoins @2.50 - total $125.00 when converted to dollars.
01/04/21 purchases 75 bitcoins @2.25 - total $168.75 when converted to dollars. At this point there are 125 units totalling $293.75, weighted average $2.35/unit.
02/25/21 purchases 50 bitcoins @2.00 - total $100.00 - at this point there are 175 units totalling $393.75, weighted average $2.25/unit.

10/30/21 SELLS 100 units @2.80 for $280.00. If we're tracking at weighted average, there are 75 left @2.25, residual value $168.75.

FIFO method: 50 units sold @2.80 for $140.00 with a cost of $125.00. LONG-TERM GAIN
50 units sold @2.80 for $140.00 with a cost of $112.50. SHORT-TERM GAIN.
2 separate transactions reported on Form 8949. $15 LT Gain and $27.50 ST Gain.

LIFO method: 50 units sold @2.80 for $140.00 with a cost of $100.00 SHORT-TERM GAIN
50 units sold @2.80 for $140.00 with a cost of $112.50 SHORT-TERM GAIN
can combine for a single transaction on Form 8949.00 $67.50 ST Gain.

HERE IS THE QUANDRY:
Weighted Average method:
100 units sold @2.80 for $280.00 with a cost of $225.00. No question the gain is $55.00 but is it long-term or short-term?
We could split into 2 reported sales with the first sale being Long-Term, but the cost associated with the first sale could not be supported by the weighted-average presumption.

If you've read this far, thank you so much for wading through the lore above. Is there a convenient answer to the Weighted Average approach??

[Lion]

There are no wash sales in Crypto (at least not for tax year 2021), so maybe you can't use the weighted average method that's more for mutual funds. Crypto is more like property and less like stocks, but it's a capital asset. Make sure you get your knowledge from the Code and Regs, but here's a commercial overview to your questions: https://medium.com/@cryptoworth/cryp...s-2272d289324c For Cryptocurrency, you might like instructors such as Knox Wimberley/Knox Taxes or John Sheeley/Tax Practice Pro.

[Snaggletooth]

Thank you for reading thru the boring calculations and providing the link. The link was written in easy language and gave numerous examples, but did not distinguish between long-term and short-term. There were abundant transactions and was an excellent portrayal of all valuation methods.

Somewhere along the way, I learned that the IRS will insist on FIFO unless the taxpayer has demonstrated consistent treatment under some other method. I have always preferred the weighted average (sometimes called the "moving" average) because at some point it becomes difficult to maintain multiple levels of LIFO or FIFO. I believe after reading your article, that the normal discerning factor for long-term and short-term should remain one year and one day, and that profit/loss should be in accordance with whichever the taxpayer has consistently used.

Thank you for your response.

[Lion]

Tracking Crypto transactions will be a nightmare with all the types of transactions that exist and are being created. I have one client who purchased only in 2020, but in 2021 started to "earn" and other transactions. I told her to use a service where she uploads from all her platforms, and the service tracks each coin and partial coin. Services can be expensive, but as the field grows perhaps the prices will stabilize. My client is on a platform that offers a service that's free for the first few transactions, and she's not making a lot of moves, so I hope she brings me her 8949 info all organized. If you love to build Excel spreadsheets, you can provide that service for your clients or purchase a service to use and pass along the price to your clients. I won't do that during tax season. Not sure I'll do it during any slow times either, but will charge a hefty hourly rate if I do.

[Snaggletooth]

I can imagine there may be several companies which calculate currency holdings, transactions, gains/losses. If some of these companies rise to prominence, how long will it be before the govt requires them to issue a 1099-B, similar to brokerage? If this happens, they will lose some of their appeal. A good many (not necessarily all) citizens invest in alternate currencies because they already distrust the govt and feel like these currencies are not as poorly controlled as the dollar.

I do have an excel worksheet which will suffice for this - which I have been using several years for mutual funds. Note that the correct information return (1099-B) for a relinquished mutual fund will show a tiny portion as "short-term" - namely those reinvestments which have occurred within the last year prior to the sale.

[terryats]

Don't forget "MINING" bit coin: following is from Notice 2014-21. Isn't tax prep becoming fun
Q-9: Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities? A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self employment income and are subject to the self-employment tax. See Chapter 10 of Publication 334, Tax Guide for Small Business, for more information on self employment tax and Publication 535, Business Expenses, for more information on determining whether expenses are from a business activity carried on to make a profit