Potential Tax Considerations for Cryptocurrency

NOTICE: This is not tax advice, but a knowledgable, non-professional opinion.  See a tax professional for best advice for your financial decisions

There are some interesting tax options when it comes to various forms of cryptocurrency.  For example, while you hold a cryptocurrency, it is treated like a stock.  Regardless of gain or loss you may enjoy while owning the cryptocurrency, there are no taxes due.  However, when you liquidate an investment into cash, the gain or loss is subject to taxation.  This is true for cryptocurrency as well.  You will need to know your initial investment and the ending value which you would include in your annual tax reporting.

A trade exchange, like a barter, is a non-taxable event if the exchange is the trade of equivalent values.  For example, you trade a boat value at $5000 for a car valued at $5000.  Other than title fees, this is not a taxable event.  The tax requirement is deferred until either asset is liquidated and a profit or loss is realized.

Canada treats barter differently.  So if you are in Canada, you may find that barter exchanges are subject to taxation.  It is hard to imagine that non-cash, non-credit card transaction between a buyer and seller is trackable.

In the U.S., self-employed people (attorneys, service providers, rentals, or a retail store) the value received in trade is treated as income.  (IRS publicatin 525)  Note that this applies to self-employed services or stores selling goods normally for cash.  The barter is treated as a cash payment.  The barter club or business needs to file the form 1099D with their normal tax forms showing the income as personal or business related.  As Form 525 ignores individuals who are not a regular business as not obligated to file form 1099D for fair market exchanges, the value appears to be non-taxed.

When it comes to capital gains, short-term gains are usually treated as ordinary income.  Long-term capital gains affect asset held for more than twelve months.  Long-term capital gains taxes are a high of 20% in 2021, but expected to increase.  

The strategy of trade exchanges is not to liquidate them.  By the way, consumable goods bought with barter are not necessarily a taxable gain.  So, tires acquired by barter will wear out and go to recycling.  Is that a loss?  Probably not, but neither is buying new tires for a gain.  

If a cake store sells a cake for $30, they pay sales tax on the sale.  If the cake store sold the cake for $15 cash and $15 trade, the sales taxes on the sale should be less.  

If a plumber took 100% of his bill in trade or barter, he still reports the income for the barter amount along with cash payment.  If the exchange was valued at $1000, he could trade $100 for a meal for his family with a barter-friendly restaurant, trade $600 barter for tires on his truck, and still have $100 in barter to buy something on a barter website.  Any non-professionals trades in the barter club are not deemed as taxable income.

Finally, many barter groups provide a line of credit to provide increased liquidity and early adoption of the program.  The barter program maintains a transaction balance for all members so the exchanges cannot be misrepresented.  A creditworthy business may receive a line of credit from $1000 to $10,000 depending on group policies.  Check your balances to show that your business is taking in more credits than it gives out.  That way the balance sheet does from negative (debt) to positive (surplus).  The line of credit is paid off as you might a credit card balance.

If a business defaults on the line of credit, it will affect its credit rating and the IRS will treat the loan as income.  Since these barter loans are often at 0% annual interest and act act a kind of revolving credit account, it is wise to keep the account at zero or surplus for times when you need to make purchases and save your cash.