If you're a US citizen, buying a coffee or any other goods with cryptocurrency has serious tax ramifications that takes several steps to ensure that all requisite taxes are paid to the U.S. Treasury and the state taxing authority. As an exercise, let's go through a rather simple purchase of a cup of coffee using the cryptocurrency Monero and see how you might account for this purchase in your year-end tax filing. (I am not a lawyer, US citizen, or tax professional - please correct any errors or omissions that you see in the following description)Action: Buy a coffee with Monero (XMR)Details: 0.05 XMR sent from your private wallet to a shop's XMR wallet to purchase a coffeeAccounting steps:1) Calculate your cost basis of XMR sent1a) Using First-In-First-Out (FIFO) accounting, identify the oldest unspent XMR in your records of all cryptocurrency trades that you've ever made1b) Calculate the USD value of these oldest unspent coins at the time of original purchase. If the XMR was purchased with BTC, go to a lookup table of averaged exchange data for USD/BTC price at the time of XMR purchase and convert the BTC purchase price to USD.1c) Be sure to include a calculation of cost basis for the XMR transaction fee as there will be capital gains on this as well.1d) Repeat this process if XMR used in purchase can be tracked to multiple purchase transactions according to FIFO designation1e) Update your FIFO records to reflect that these oldest XMR are now "spent"2) Calculate the USD value of XMR and XMR fees at the time of the transaction2a) Using a lookup table, calculate the average exchange price for BTC/USD at the time of purchase2b) Using a lookup table, calculate the average exchange rate for XMR/BTC at the time of purchase2c) Using exchange rates from Steps 2a and 2b, multiply (XMR + XMR transaction fee) by BTC/XMR ratio from 2b, then multiply by USD/BTC rate to calculate the USD value of XMR and XMR fees used in the current transaction3) Calculate Gain/Loss of XMR and XMR fees3a) Subtract the cost basis determined in Step 1 from the USD value determined in Step 2 for USD value of XMR plus XMR transaction fees3b) Identify whether the oldest unspent coins from Step 1a were purchased more than a year ago3c) If coins older than a year, record the Gains/Losses from Step 3a as a long-term capital gain/loss3d) If coins held less than a year, record the Gains/Losses from Step 3a as a short-term capital gain/loss4) Pay taxes for 2019 tax year4a) File Form 1040 to the IRS for tax year 2019 which includes the Gains/Losses calculated in Step 3 as long-term gains recorded on Line 13 or as short-term gains recorded on Line 14 in the form. Include all cost basis, timing, and price details in an attached 1099-K of the XMR transactions used to purchase the coffee. This could include multiple line items if multiple purchase transactions were identified through FIFO as being the source of unspent coins used during the coffee purchase transaction.4b) Calculate federal taxes owed by determining your applicable capital gains tax rate for 2019 and multiplying by your long-term capital gains from the transaction. Calculate short-term gains according to your applicable short-term rate. Depending on your tax bracket, these may be as high as 18% and 38% of gains, respectively.4c) Calculate state taxes owed (varies drastically from state to state). Determine tax liability from both long-term and short-term gains or losses.5) If a gain was determined in Step 4a and tax liability is owed, then pay federal and state tax authorities the owed tax liability.6) Make four estimated tax payments in 2020. If you expect to continue buying coffee in 2020, then file a federal Form 1040-ES and make quarterly estimated payments to the US Treasury for the approximate annual gains to be made in the underlying cryptocurrency asset being used in the expected purchases. A defensible position is to take the tax liability calculated in Step 4b and divide these totals by 4 to determine how big of quarterly federal tax payments to make. Depending on your state of residence, you make be required to make quarterly payments to your state taxing authority as a function of 2019 gains calculated in Step 4c. Did I miss anything?
Submitted July 29, 2019 at 02:57AM
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