Updated: Dec 12, 2019
The final installment of our 3 part crypto tax journey focuses on property, payments and services, and gifts – including charity – made in cryptocurrencies.
Property, Payments, and Services
Whenever you perform services (whether you are an employee or independent contractor), and you receive property, including cryptocurrency in exchange for performing those services, you are considered to have received ordinary taxable income, even though it is not in the form of FIAT cash.
If you are an independent contractor, it is important to note that the fair market value (FMV) of virtual currency received at the time services were rendered is measured in U.S. dollars according to the date of receipt, and falls under self-employment income and is subject to the self-employment tax.
When virtual currency is paid to an employee as wages, those funds are measured in U.S. dollars at the date they were received and are subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. You must report these on your W-2.
“ We all like gifts. They’re fun, usually unexpected, and make us happy. So if you’ve been a lucky recipient of a gift in virtual currency, the IRS will not recognize that gift as income until you sell, exchange, or dispose it. ”
Gifts and Charity
We all like gifts. They’re fun, usually unexpected, and make us happy. So if you’ve been a lucky recipient of a gift in virtual currency, the IRS will not recognize that gift as income until you sell, exchange, or dispose it.
According to the IRS, “the basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it.” When it comes to the holding period of that virtual currency, it is also important to note that the holding period includes the time period that that virtual currency was held by the person that gifted it to you. If in the event you do not have documentation on the gifters holding period, then your holding period begins the day after you receive your gift.
Gifts & Gain
You are considered as having a gain if your basis is equal to the donor’s basis, including any gift taxes that the donor paid on that gift.
Gifts & Loss
You are considered to have suffered a loss if your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero.
As good as getting gifts feels, giving feels even better. If you have given charitable donations in the form of virtual currency (any organization that fits the description outlined in Internal Revenue Code Section 170(c)), you will not recognize income, gain, or loss from the donation.
When listing your charitable deduction, it is generally equal to the fair market value of the virtual currency at the time you made the donation if you held that virtual currency for more than one year. If you have held the virtual currency for one year or less at the time of the donation, your deduction is the lesser of your basis in the virtual currency or the virtual currency’s fair market value at the time of the contribution.
Or Lokay Cohen is a vice president at Bittax, a crypto tax calculation platform. Or has 10 years’ experience with regulation, managing a leading tax consultant firm. She holds a LL.M. law degree, a B.A. in communications and an M.A. in management and public policy. In her work at Bittax, Or promotes the goal of bridging cryptocurrency to the taxation reality to enable tax reporting under a clear regulatory framework and specific identification methods.