Bitcoin, and Blockchain and Cryptocurrency are words that we see or hear several times each day.
The kingdom of Bitcoin, Blockchain and Cryptocurrency rules our topic of the week. Gavrilov & Co Accounting is aware people think they know about Bitcoins. True, they hear about them in daily newscasts. However, people have great difficulty defining Bitcoin or Blockchain when asked. In fact, it is amazing how few people understand the meanings of these words. And curiously enough, they might even be the owners of Bitcoins. And we must say, they are probably taxable owners.
You might be one of them or you might simply want to be better aware of the place of Bitcoin in the fabric of the Universe. Since the media is paying so much attention to Bitcoin and Cryptocurrency, let’s take a quick look at it. Then let’s preview the tax situation of Bitcoin owners.
The Bitcoin Backstory
We will decide if owning bitcoins is your super-power or your Kryptonite. But first, let’s define a few terms. First of all, let’s place the phrase in recent history. “Bitcoin is a new currency that was created in 2009 by a person who identified himself only as “Satoshi Nakamoto.”
Care and Feeding of Bitcoin: The Basic Traits
Below, Gavrilov reveals several basic traits of Bitcoin for you to read or review. Then we will progress to a little tax talk.
1. Bitcoin is neither owned by a bank nor controlled by a financial institution. “Transactions are made with no middlemen – meaning, no banks!”
2. You utilize this currency anonymously. In fact, anonymity is essential to the world of Bitcoin usage. Each bitcoin transaction is recorded in a public log. However, the “names of buyers and sellers are never revealed – only their wallet IDs. That keeps bitcoin users’ transactions private. And it also lets them buy or sell anything without easily tracing it back to them. On the one hand, “that’s why it has become the currency of choice for people online buying drugs or other illicit activities.”
3. On the other hand, “international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation.” (Now, remember that bit about regulation—we’ll be returning to it shortly when you pay your taxes.)
4. By the way, when you pay with bitcoins, neither seller nor buyer ever pays credit card fees.
5. Investors buy and sell bitcoins on special Exchanges. And they hope to see them go up in value, just like they buy and sell on the stock exchange. There are many bitcoin exchanges which allow trading, but be aware, security can become an issue.
Let’s Go A Little Deeper into the Heart of the Bitcoin World
1. Most people realize that cryptocurrency is simply a digital medium of exchange that uses encryption to secure the processes involved in generating units and conducting transactions. … Among them, Bitcoin is the most prominent example.
2. Since Cryptocurrency like Bitcoin doesn’t run under a central owner or controller, the innovative heart of it is that it utilizes a massive network of computers to create “consensus in a massive peer-to-peer network to verify transactions.”
3. This is basically the Blockchain: a massive number of computers all operating under a transparent system in which they all see the same ledger. They spend a lot of time and energy when they approve each other’s transactions, but they work from buyer to seller with no interference from an outside influence like a financial institution.
Bitcoin and Working in the Coal Mine—Or Bitcoin Mining
4. In the Blockchain, “Some users put their computers to work verifying transactions in the peer-to-peer network mentioned above. These users are rewarded with new bitcoins proportional to the amount of computing power they donate to the network.” You might have heard of this computational verification activity as Bitcoin mining.
One more point you should know is these users are rewarded with new bitcoins in proportion to all the computing power they donate to the network. When all the users in your network validate your transaction to buy a trip to Rome or a pita bread sandwich, then you are spending your bitcoins, and you can only do so because the network verifies you. That network is the Blockchain.
A. So, we know that “The Bitcoin blockchain in its simplest form is a database or ledger comprised of Bitcoin transaction records.”
B. Since this database is distributed across a peer-to-peer network and is without a central authority, network participants must agree on the validity of transactions before they can be recorded.
C. This agreement, which is known as “consensus,” is achieved through a process called “mining.” Thus, the “miners engage in complex, resource-intense computational equations to verify the legitimacy of the transaction.” And everybody in the network sees it in their online ledger. Therefore, no one can spend the same money twice or 200 times!
D. Thus, the Blockchain is simplistically and essentially defined as “A global network of computers uses blockchain technology to jointly manage the database that records Bitcoin transactions.”
5. Much different than a bank, “This results in a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower.” And, yes, again we hear there is a lack of regulation. “However, some countries like Japan, China and Australia have begun weighing regulations.”
Bitcoin and the Crux of the Matter for Accountants: Crypto-Tax for Cryptocurrency?
First, you must have guessed that Governments are concerned about taxation for this rogue and unanticipated type of digital currency.
Second, they are very aware of their lack of control over the currency. The Bitcoin phenomenon is rather like a herd of unicorns running amok through the established financial institutions of the world.
What’s In Your Bitcoin Wallet?
Expedia uses it. Kodak uses it. CNN recently used it experimentally to buy lunch, a limo ride, flowers and drinks. “There’s room for more than one currency,” said 42-year-old Philipp Preuss, who is selling a house in the Hamptons (Southhampton) for the Bitcon equivalent of 799, 999.00 to the Wall Street Journal.
Here’s what makes that a little awkward. Bitcoin can be a little unpredictable. The value “has fluctuated this year from $13 in January 2017 to $1,200 in late November.”
Third, we assume you are a business person and you want to do the most ethical and reasonably priced tax thing available to you at the current time. You own a nice stash of cryptocurrency, and you have no idea how to fit it into your financial statement, or how to pay tax on it. You also do not want to waste valuable time trying to figure it all out. Gavrilov Accounting is here for you.
How To Pay Tax On Your Bitcoin Stash – The Gavrilov & Co Way
If you are a Gavrilov & Co client, we won’t let your cryptocurrency become your kryptonite. We’ll keep you on top with the latest tax guidelines and regulations. That way, your super-power as a savvy taxpayer will never be depleted.
You see, we understand that Calculating capital gains/losses for Bitcoin isn’t always as simple and easy as working with dollars and cents.
- It might be difficult to guess-timate the cost basis of every one of your BitCoins. It could also be difficult dealing with alt-coins such as Ethereum, Litecoin, Dash and Ripple.
- You should track profits when you buy or spend or sell those Bitcoins or Alt-coins. We can help with that. We work with all Major world currencies: USD, GBP, EUR, CAD, JPY, CHF, HKD, RUB, ILS, KRW AUD, SEK, NOK, BRL, SGD, CNY. And now we add digital currency to our lists: Bitcoin, Ethereum, Dogecoin, and other alt-coins.
- Plus, we can identify and strategize the best ways to identify your trades and optimize your taxes.
What Our Bitcoin-Savvy Tax Squad Does
- We will help you import your trade histories from the major exchanges.
- Then we will track your income and mining as well as spending from such sources as Coinbase, Core Wallets, “Blockchain.Info” and CSV. (Yes, declaring your mining is the right thing to do.)
- We’ll check out your FIFO, LIFO, and double check your average costing or specific identification.
- We’ll Calculate your Capital Gains Tax.
We can then attach this information all this information to your completed IRS tax form.
Our Tantalizing Take-Away
No matter which currency or alt-coin you use, you will really value our customized support this year. However, just wait until 2019, 2020 and 2021. This is when you can taste the strategy of our individualized planning and Multi-year support. Gavrilov likes to give you the Big Picture. And we can do it for you in dollars or in Bitcoins.
Thank you for reading our featured blog on Bitcoin, taxation and the Big Tax Picture. We know you might consider our Bitcoin clients as only a niche group. But the Bitcoin believers are growing this new form of digital currency by leaps and bounds.
Who knows where it will lead? One day, sooner than you think, using Bitcoin might become very common. It could become like Great Grandfather’s new Diners Club Card of 1951 or Grandfather’s Deluxe plastic American Express card of 1959 or Dad’s iconic 1966 Bankamericard.