One of the many crypto trends in 2021 is more companies being willing to accept crypto as payment for their products. Tesla became the latest major player to state it would accept bitcoin as payment for its cars. The Oakland Athletics baseball team offered its luxury boxes for all 81 home games for the price of 1 bitcoin prior to the 2021 season. Furthermore, PayPal recently announced it would soon begin to allow its more than 226,000 retail customers world-wide to accept crypto as payment. The remainder of this article examines the tax ramifications for individuals exchanging their crypto positions for property.
In situations where an individual exchanges crypto for other property, the individual will recognize capital gains or losses on the crypto that was used in the transaction. The IRS treats an exchange of crypto for property no different than an individual cashing out his/her crypto position for USD. Therefore, individuals who exchange their crypto for property are left in the exact same position as if the individual had simultaneously liquidated their crypto position to USD and then purchased the property with USD.
An example may help flesh out the details of the tax principles. Suppose McGee purchased two bitcoins for a total price of $20,000 in 2018. As explained in our previous publication, The Basics of Basis in Virtual Currency, McGee’s basis in his two bitcoins would be 20,000. One day McGee decides he wants a new car to impress his friends Riley and Abbey. He looks into several car options before settling on the new Tesla Model X which costs100,000. At this time each bitcoin is worth 50,000. McGee learns Tesla is accepting bitcoin as payment for its cars so he decides to exchange his two bitcoins directly with Tesla for his new Model X.
After the transaction McGee will have no bitcoin but he will have his new Tesla. However, and importantly, McGee will have a pretty large tax bill that he owes. McGee would owe long term capital gains as a result of exchanging his bitcoins for his Tesla. In this case, McGee’s basis would be20,000. McGee exchanged his two bitcoins for a 100,000 Tesla. Therefore, McGee would have to pay long term capital gains on80,000 (100,000 -20,000).
However, let’s assume instead that prior to buying his Tesla McGee decided to cash out his two bitcoins and received $100,000. As discussed in our previous publication, Selling Virtual Currency – What are the Tax Consequences, McGee would have to pay long term capital gains on 80,000 (100,000 - 20,000) as a result of cashing out his bitcoins. McGee could then take the cash and buy his new Tesla.
In both scenarios above, the first where McGee exchanges his bitcoins for a Tesla and the second where McGee cashes his bitcoins out and then buys a Tesla with his cash, McGee would owe long term capital gains of80,000. It makes sense that the two scenarios have the same tax outcome. Whichever scenario McGee chooses, it is important for him to remember that he will owe taxes on $80,000. He should make sure he has cash to cover the tax obligation before spending all the money on his new Tesla. Not accounting for taxes that will become due is a big mistake being made by individuals selling or exchanging virtual currency.
An individual who exchanges virtual currency for property will have capital gains or losses associated with the exchange. It is important that individuals deciding to exchange virtual currency for property understand the tax ramifications such transaction may have on the individual. If you have any questions regarding the concepts discussed in this article, please contact us.
