 Hello and welcome to the session. This is Professor Farhad and this session. I'm gonna look at the taxation of cryptocurrency Usually I have accounting and CPA lectures in this session It's about cryptocurrency, but specifically about the taxation aspect of cryptocurrency. This is an educational video This is not a tax advice, but after you after you view this video You should be able to speak to your accountant your tax advisor to your CPA about your cryptocurrency This is basically for educational purposes not as a tax advice as of today The topic of cryptocurrency specifically is not covered on the CPA exam However, the taxation of the cryptocurrency the cryptocurrency is not different than any other property So the taxation topic of it will help you understand the taxation of property on the exam But the cryptocurrency as of today. I'm not aware that it's covered. I Am positive that in the future it will be covered before we start I would like to remind you my viewers to connect with me. I do have a LinkedIn account. I'm very active on LinkedIn Please connect with me on LinkedIn. If you don't have a LinkedIn account, I strongly suggest you do create a LinkedIn account YouTube is where I house all my lectures. I have over 1400 accounting Taxes audit CPA lectures on YouTube. Please visit my YouTube subscribe like share Share the recordings. Please follow me on Instagram and I do have a Facebook account So let's start talking about the IRS and cryptocurrency because if we're talking about taxation, you cannot Ignore the IRS. It's the 800 pound gorilla and drone So the what you need to know is the only regulation or the only guidance that the IRS issued was a notice in 2014 and I put the link in the description for you if you'd like to look at it And most of this lecture is based on this link And that's the only thing that they have I believe it's seven or eight pages when I read it It's pretty straightforward in a sense of understanding it But there's it leaves a lot of gray areas for practitioners The first thing is your nose the meaning of cryptocurrency The meaning of it is it's a virtual convertible currency not actual currency So they don't consider the cryptocurrency like the pesos the yen The euros or anything like that. It's it's a virtual convertible currency and the what's the IRS looking for is compliance the IRS wants to make sure that individuals who are trading cryptocurrency are Declaring specifically their gains not their losses their gains because if you have gains You have to pay taxes on the gains and two thousand and fifteen only 802 investors declared that they traded and made profit on cryptocurrency So you would say I would if I have to guess it's an under under reporting people are not reporting their gains What was the sum of the IRS responses the IRS partner with a data analytical company called the chain analysis To track visualize and analyze Bitcoin transaction to uncover any tax evasions of gains So they want to make sure that if you are participating in cryptocurrency you are you are generating gains You're gonna have to pay taxes now How are you gonna pay taxes is it capital gains is ordinary income will talk about this shortly. That's the purpose of this Also, the IRS pressure Coinbase which one of the major exchanges for cryptocurrency to identify users that traded more than $20,000 in Bitcoin between 2013 and 2015. So notice the IRS is cracking on not cracking They just want to uncover any any individuals that are That are trading the currency and obviously making profit from the currency So the way I'm gonna explain this is Starting by walking you through some examples and the best way to illustrate this is what is the source of your cryptocurrency? So I'm gonna walk you through an individual. So how can an individual obtain obtain cryptocurrency and based on that? I'll explain the taxation topic So there are the first thing you can do is you can work for your cryptocurrency earn it earn it through wages or Through self-employment and I'll tell you I had my own experience. I had a lawyer contacted me from LA He wanted me to do to train his staff about schedule C about taxation And he said he's gonna pay me in cryptocurrency and that's a couple years ago And I did not really understand what cryptocurrency was But if he paid me with cryptocurrency, that would have been considered earnings for me wages Okay So one way to get cryptocurrency is through wages and we're gonna talk about what are the tax consequences of they are considered wages or Self-employment income another way to obtain cryptocurrency is to take your own money Feed out money currency and buy Bitcoin buy cryptocurrency So you can buy it from another party from another person from an exchange buy it basically exchange your money That's another way to do so a Third way to obtain cryptocurrency is someone will gift it to you Someone somebody will give you some cryptocurrency And I know one individual that somebody just gave them some cryptocurrency And sometimes they do so to to encourage you to entice you to start buying and selling just for disclosure purposes I never ever bought cryptocurrency although I can I trade on regular basis in the stock market more than regular basis So I am I am a trader, but I never looked under cryptocurrency. I know it's not well regulated and that's why I'm away from it So just FYI for disclosure purposes. So don't think I'm trying to sell you cryptocurrency Matter of fact, I would say avoid something you don't understand. I don't understand cryptocurrency I understand the taxation of it just FYI. Okay The other way you can obtain cryptocurrency is exchange it You might have Bitcoin and you might exchange it into alt alt coins. So exchange one currency into another. What are the tax consequences there? You can mine cryptocurrency If you mine the cryptocurrency you obtain it from mining and we're going to talk about what does it mean by mining and what are the Tax consequences and the last topic I will talk about is something called reporting issues What are you what are you required to report as as an individual? Involved in cryptocurrency somehow and would look at what's called TPSO third-party settlement organization And they use the form 1099k will look at those as well because that's relevant for what we are what we're going to be talking about So the first thing we're going to look at and before we proceed. Is there any other scenario that I did not cover here? Of course there is but I believe those are most common scenarios that I'm I'm gonna try to explain So the first common scenario is you earned it you earned the cryptocurrency you earned it you work for it Okay, so you work for it. Okay So just let's review the IRS does not treat it as a currency that generate foreign currency gains and losses because that will Take us down to a different route. So that's not the case. So how does the IRS looks at cryptocurrency from a tax perspective? Well easy cryptocurrency is treated as a property As far as the IRS is concerned now if you're a CPA if you're a practitioner and I told you this is a property Not specifically not a real property in a real state. Then you should know Basically, this is the key. This is the key to everything that you need to know assuming You know what does property mean when it comes to taxation? But this is I just gave you the answer basically, but I'm gonna explain everything you need to know But it's considered a property. So what does that mean? Well, think about it property means what property means If you provided a service, let's start let's assume you work for it. So I am a plumber So I provided I provided you a service. So I'm the plumber. I went to your house. I fixed your sink Um, okay, as a result, you don't have cash to pay me. You gave me this joystick Okay, it's for your play station. This joystick is worth $200. So I spent two hours fixing your sink. I charge you an hour each You don't have the cash you gave me this joystick I walked away happy with that joystick that joystick is considered a property I obtained the property in exchange in exchange for my service. So guess what? I have if I am a self-employed individual I have revenue of $200 Okay, now let's switch this and let's assume you gave me One unit. Let's assume you gave me one unit of a cryptocurrency coin called lit coin Just kind of just to give you an example. You gave me one unit and that's equivalent to $200. So you don't have this joystick You have some cryptocurrency and you gave me that one unit. Well, guess what? I have revenue of $200. Okay, so it's assuming that lit coin is worth $200 per unit So what do I need to do? I need to include the fair market value of the virtual currency received measure in us dollars As of the date of the virtual currency is received. So if you gave me that one unit of lit coin And it's worth on that date each unit is worth $200. Guess what? I have wages. I have taxable income I'm sorry, not wages. I have revenue now if I'm If I am an employee that I have wages, okay? So let's assume just for the sake to illustrate this john doe and I'm gonna be abbreviating this john doe jd Throughout this recording received one unit of bitcoin for home remodeling. So for home Remodeling here received one unit the fair market value of the bitcoin btc That's the symbol for it is $8,000 on the date of the receipt. So john doe remodeled your home You don't have cash to pay john doe. So you pay john doe telling me a lot you remodel my kitchen I'm gonna give you one unit of bitcoin and the day that you receive that bitcoin. It's worth $8,000 Guess what? You have income of $8,000. It's regular income. It stacks on your ordinary rate Whatever your ordinary rate is if you're self-employed you include this with your income Let's assume you are an employee of a company and they paid you in bitcoin If you're an employee now and they pay you in bitcoin, then you have also ordinary income It stacks on your ordinary rate subject to federal income tax withholding social security Withholding FICA food a federal insurance country federal insurance State insurance everything and must be reported on your w2. So if you're an employee Just it's as if they paid you cash and how much is the cash? The value of that current the value of the currency on the date that you received it Okay, that they have to find out what's the value. So how is the fair fair market value determined? It's there's exchanges and you'll have to determine What is the fair value of that currency on that date? You could always go back and look it up if you receive the currency Because they should have a record just like you have a stock and this is an example of Certain prices for the currency just to give you an idea for example bitcoin. I don't know what date is this It's was traded at eight thousand seven hundred nine dollars Ethereum 272 x rp 45 pennies someone and so forth. Okay So that's that now So now you earn that you remodeled the home and you earned that one bitcoin Okay, and that bitcoin now considered property. So you have it in your in your account Virtually in your account somewhere in your virtual wallet. You have one bitcoin. That's worth remember It's worth eight thousand dollar when you received it. It was worth eight thousand dollar, right? It was worth eight thousand dollar now. This is a property for you the basis now This is important now now it went from it was wages to you and it was tax So you had to pay taxes you paid you're gonna have to pay taxes on this wages. You have to pay taxes on the eight thousand dollar Then Assuming you paid the taxes Not assuming you paid the tax on this eight thousand dollar now that property remember bitcoin You have one unit of bitcoin the basis when you acquire that it's the fair market value on the date it was received The basis of that property is eight thousand dollar and basis is important because what's gonna happen You're not gonna keep this bitcoin forever. You're gonna have to do something with it What can you do with that bitcoin think about it? What can you do with that one unit of bitcoin? What can john doe do? Well, they can sell it. They can sell it to somebody else on the exchange They can purchase goods and services with it on ebay They can exchange it for another currency. They don't like this currency. They might change it into lit coin Or they may gift it to someone else. Those are the possible scenarios that john doe might do Okay, there's another scenario. They can keep it until they die and it gets inherited Okay, we're not gonna talk about this but it's gonna be treated as a property with the basis of eight thousand dollar As far as we are concerned. So let's assume one month later just kind of work through these scenarios John doe sold this one unit of bitcoin for nine thousand dollar now remember John doe paid taxes on the eight thousand dollar and his basis became eight thousand dollar now if he sold it for nine thousand dollar His adjusted basis are eight thousand So he had a one thousand dollar short term capital gain. Why short term capital gain because he hold it less than a year I said a month later Okay, that that one thousand dollar is takes at ordinary income up to not 39.5 up to 39.5 It could be zero if if they are in the low bracket low bracket taxes So depending what your tax rate is and based on your ordinary tax rate, you'll pay taxes on this Why do you why do you use ordinary ordinary rate because you held it short term? So it's a capital gain and it's short term Okay, now let's assume you waited one year plus you waited John doe waited more than one year then And assume they sold it for nine thousand that That that one thousand becomes long term capital gain long term capital gain treatment is different long term capital gain You may either pay no taxes depending on your income if your income is low There's a threshold you pay no taxes you you might pay 15 percent or you might pay up to 20 percent Okay, now if you're interested to hold on a second What is he talking about long term capital gain go to my tax course and I will explain to you Long term capital gain. How is it taxed at zero 15 or 20? Okay, but Generally speaking not generally speaking long term if you hold something long term If you have a capital gain that's long term generally speaking you pay less taxes day short term Okay, so you want to hold it long term? Okay, let's assume on the other hand John doe sold his one unit at seven thousand. Well, what does seven thousand mean his basis were eight thousand remember the basis were The basis were eight thousand He sold his Bitcoin for seven thousand John doe needed money and that was the fair market value So guess what John doe will have a capital loss of a thousand dollar capital loss of a thousand dollar capital loss can offset Capital gains so if John doe has capital gains from other transactions stocks bonds So let's talk about property and to be more specific. I mean, I should have I should have explained this little bit little bit more in detail Cryptocurrency is a property, but it's considered capital asset So they have capital gains that would that will have capital gains and capital losses So that one thousand dollar of losses can offset capital gains whatever capital gains They have from other corrupt from other cryptocurrency or from other capital From other capital gain, okay Any capital gain loss remain let's assume they have a lot of capital losses Guess what you can deduct up to three thousand of net capital gain losses against ordinary income So after all said and done if you still have let's assume 10,000 Of losses for that year from cryptocurrency of that 10,000 You can deduct three thousand against ordinary income and the seven thousand because it's capital losses You can carry for future years. So the capital losses you can use some of it three thousand and the rest you can carry okay And the same concept would apply if John doe purchased a computer for nine thousand dollars that assumed John doe rather than selling the securities for Nine thousand he went there and he bought a computer for nine thousand dollars super computer Okay for nine thousand dollars. Guess what because he bought the computer for nine thousand dollar exchange in the bitcoin John doe has a capital gain of a thousand dollar because his basis in the property And the one bitcoin is eight thousand and he exchanged it for something that's nine thousand Well, you have a capital gain of a thousand same concept apply if he bought the computer for seven thousand He incurred a loss of a thousand dollar and the same concept would apply If John doe exchange that one bitcoin into another cryptocurrency So if he exchanged it for nine for nine thousand dollar worth of lit coin because he gave them one unit That's worth for him not worth for him. His basis is eight thousand They gave him something that's worth nine thousand John doe has a thousand dollar worth of capital gain Whether it's short term or capital Short term or long term depending on how long he held that property But he does have a capital gain and if he exchanged it for lit coin, that's worth seven thousand dollar today Well, he exchanged something eight thousand. That's worth seven thousand You might say why is he being taxed on this exchange? It's as if John doe sold it for seven thousand incurred the loss to that seven thousand dollar and bought lit coin Or as if John doe sold the the bitcoin for nine thousand Took the nine thousand and bought bought lit coin. So that's why the exchange is considered A realizable transaction a taxable transaction. Okay What happened when you purchased the cryptocurrency now what you do is you take your own money fiat money and you purchase cryptocurrency like bitcoin The most important thing is here is to know your basis and what is it generally your basis? Generally, your basis is generally speaking. It's what you paid for the For the for the item plus maybe some necessary fees commissioned, but generally speaking. It's what you pay. So let's assume John doe went out to a one of the exchanges and bought one unit of bitcoin for eight thousand dollar Now he did not earn it. He did not earn the bitcoin. He purchased it Now it becomes very important to determine what's the john doe is going to do with this property So he has a property in his hand and that property is one unit One unit of bitcoin Well, it could be that he acquired it for investment purposes Or he could have acquired it for trade or business now. We have to explain this I'll try to simplify it as much as possible. Okay So I am a college professor. That's what I do for a living. I'm also a youtuber Assuming I bought this one unit of bitcoin Okay, am I in the business of buying and selling cryptocurrency? Not at all most probably I am an investor I'm just and I bought this bitcoin just like I would bought any other stock like apple computer stock from the stock market So depending on you're holding this property. What what are you holding it for? So I would have to say I mean, I'm not gonna I'm I'm just gonna make a general statement that most people when they buy cryptocurrency Divide for investment purposes if it's an investment. It's considered capital asset It's considered a capital asset. It means when you sell it you have a capital gain or you have a capital loss If you hold it for a trade or a business What does it mean if you if you bought it and you have it for a trade or a business? It means that's what you do for a living for a living you buy and sell cryptocurrency That's your trade or a business now How do you determine if some if someone Is in the trade or a business of buying and selling cryptocurrency? Well, that's what they do they in and they out Eight hours a day they buy and sell cryptocurrency and that's all what they do If that's the case it might be considered trade or a business now The irs does not define what's considered trade or a business as far as cryptocurrency. Basically you are becoming quasi Dealer a dealer or broker in cryptocurrency And again, if you look at the at the pdf form, they don't say what what qualify what are the criteria Specifically what are the criteria? But I would have to say if that's what you do if that's the only thing that you do You might be in the business of buying and selling and there are other criteria that you have to meet the irs requirement Okay, if you if you treat it as a trade or a business and we'll talk about the consequences about this About whether it's for investment purposes or for trade and business So if it's in your hand and it's for investment purposes, which what most deem it the vast vast majority of people It's considered a capital asset Whether you exchange it whether you sold it the same concept that I gave you earlier when john dove sold or exchange The bitcoin will apply here If you exchange it from one cryptocurrency into the other Section 1031 like kind exchange does not apply and this is important There's a lot of confusion that this is a property and a lot of people think if you if I exchange one property into another property It's it's a tax deferred transaction. What does it mean tax deferred? It means if you have a gain you don't have to pay taxes you can defer it This does not apply to cryptocurrency. Remember when we exchange bitcoin To litcoin what I told you is it's as if you sold it took the cash and bought the litcoin So section 1031 applies to real estate So it has nothing to do with cryptocurrency. So so like kind exchange does not apply I just want to put it here section 1031 just to kind of make it explicit. It does not apply Okay, why because the assumption is you sold and you bought another currency Now if you transfer your cryptocurrency from one exchange to another Now what you did is you took your one bitcoin and took it from one exchange from for example from coin base And you went to betricks. You you you transfer your property you transferred your property You did not sell it. You did not exchange it. That's not a not a taxable event if you transfer it Okay, and again short term and long term capital gain rules would apply whether you whether you Hold it less than a year or more than a year and guess what for investment purposes You have to fill out for 89 49. You have to fill out for 89 49 Let's take a look at form 89 49 just to give you an idea how this this whole thing work So once you see it, you might say, okay now it makes a little bit more sense. So let's take a look at form 89 49 So this is for 89 49 sales and other disposition of capital asset So what you have to do you have to put here in the description the description of the property, you know 50 units of Litcoin when did you bought it date acquired here the date acquired Date sold date dispose of how much did you receive? What are your cost basis? So let's assume You you received let me just give this example here Since we work this example earlier. Sure if I can't type here or not I can't type on this. I don't know why I can't type in these boxes So you'll for example you the proceeds as you put 9 000 your cost basis will be 8 000 and you have a gain of a thousand You have a gain or a loss of a thousand and you add up all of your all of your Transaction this will include the stocks the bonds everything else actually you can you can't type now. I see just have to tap Okay, so this will be date acquired o one 15 2019 date disposed of three 10 2019 the proceeds were nine thousand dollar Cost basis were eight thousand. There is no adjustments to anything and I have a gain Of a thousand whether this is short term or long term depending on how long I held this so on and so forth But this is the form 89 49 you list all your You list all the property transaction whether it's short term whether it's short term part one or Long term part two Let's get back to the power point presentation Okay, so I showed you form 89 49 just to give you an idea and just hopefully once you see it You're just like, okay. This makes sense now Um, what's important here is record keeping because you remember you notice I showed you have to know the proceeds and how much you paid for something Well, keep track of your record. Okay download your record from the exchange if that's the case Larger exchanges usually keep track of this, but you cannot rely on them. What if they lost their data? The the bad thing is well the bad. I'm not gonna make say bad or good. There's no requirement Now some people say this is for them. This is good. Some say this is not good There are no requirements for the the the artist does not require the the exchanges to keep any track That's a good thing. That's a bad thing again I'm trying to stay away from the word good or bad because let me let me tell you what I mean by this if you own stocks and bonds and investments and let's assume you have an account with Shard Schwab or Merrill Lynch what they have to do they have to send you a 10 99 B Which is a report of all your transaction and they will send a copy to the IRS as well as of today If you own this this cryptocurrency The IRS don't really receive anything formally from the exchanges So in a sense it's self reporting in a sense you are responsible for keeping track In a sense you could be in trouble if you were audited and there are other ways for the IRS to know because sometimes those The information is public not necessarily with your name, but they might be able to track it So just FYI since there are no requirement make sure you keep track of your of your Of your transaction or in the future. I would I will bet on it in the future I don't know when but at some point the IRS will require those exchanges to report Transaction I'm I will say this with confidence, but I cannot you know I cannot be 100 confidence. So remember you are required to pay taxes on your gains Um, it they they might be they may not be traced today immediately by the IRS But in the future they might be and there's a website called coin tracking dot info if you go there Um, they they have a place where you can keep track of this. It's really interesting So this is we talked about investment purposes So you bought the bitcoin and this is for investment purposes and this is what most people do They buy bitcoin and they have it for investment purposes Let's assume you bought the bitcoin and you are in the business Of trading the bitcoin. So you're in the business. That's all what you do And this is basically not a lot of people. I'll have to say well Then whatever you bought is considered inventory not capital asset and what's considered inventory. It's an ordinary asset Ordinary asset are subject to ordinary income. So capital gains and capital losses are no longer applies here. Here you have Ordinary income. So if you make any profit you have ordinary income not not capital gains Not capital asset not capital gains and capital losses. Okay, whether you exchange it or sold it You have ordinary income. So if you bought something for nine to eight thousand sold it for nine The thousand dollar difference or if you bought something for eight Sold it for nine You have a one thousand dollar of ordinary income Okay versus here if you if you bought something for eight sold it for nine. It's a capital Game it's different the way it's treated. It's different. Okay Then you are subject to self-employment tax based on your net earnings. That means you could have expenses related to your business You have ordinary income ordinary losses The loss will apply as well and the loss can be can be upset against other ordinary income Again, it's taxed at ordinary income. You could have scheduled c s corporation c corporation You could be operated just like a business just like any other business. Now also bear in mind It's want to make quick comment here again. I'm not giving any tax advice. I'm not this is just for informational educational purposes Also, you may think you have a trade or a business or the rs might say you have This they might consider what you do as a hobby Now when would the rs consider something as a hobby? I'm not going to go over this if you're interested You can go to my Income tax course and there are rules for hobby and when something is considered a hobby you can deduct expenses Up to your income so you cannot deduct your losses. Okay, but generally speaking its investment purposes or trade Again, the irs. This is a great stale great area for the irs Let's talk about briefly about initial coin offering or ico It sounds like ipo initial public offering. So what is an ico? Well, we'll talk about ico in a moment So the first thing we're going to determine is cryptocurrency a security per the sec What is a security a security involved the investment of of money the investment of money In common enterprise in which investor expect primary profit primarily from the effort of others And what's a security is when you people pull their money together You put money in an enterprise and you expect to benefit from that benefit from the profit While others are making an effort basically in a sense like Quote-unquote passive income you invest money. You don't do anything and your money is working for you in that enterprise. Okay So what happened when you invest In an ico initial coin offering investors and ico receive token like a cryptocurrency. What are we talking about here? Let's assume a new corrupt cryptocurrency No exchange is created. So what they do is this they will come to you and they would say we are starting this exchange would you be interested in Contributing money. So what you do is you give them money You give them money so they can hire programmers. They can they can buy computers. They can buy computing power to create the exchange. So you give them money so they can mine Cryptocurrency or they can create the cryptocurrency and what happened as a result They will give you a token like some cryptocurrency money. Okay Let's assume for your effort. They gave you 10 units of this Currency now you hope that once this currency is up and running Those 10 units are worth something and you can sell it later. So when you invest you get a token It's like basically buying stocks in an initial public offering. It's called the stocks Let's think about think of it as a token and rather than an IPO you invest in an ico Okay Why is this important to determine if a secure if an ico Is a security or not the security per the sec There's something called the wash sales. That's the wash sales apply if something considered a security What's going to happen is this If you sold something today at a loss Okay, if you sold something today at a loss And if you bought it back within 30 days before i'm 30 days after let's say 30 days after If you bought it 30 days after or 30 days before Then that loss cannot be deducted. It's considered a wash sale What can you do with that loss that loss is added to your Cost basis of that new security because you bought it. So you sold it at a loss Be careful if you sold something at a loss you want to wait 30 days until you buy it again Otherwise if it's security the wash sale will apply if it's not a security the wash sale does not apply And that's why we need just kind of we kind of went after I care to talk about securities Generally speaking what's considered security and what's not likely considered a security by the sec And notice that language generally it's very vague not likely not likely considered a security if you have a bitcoin not likely a security and Ethereum not likely a security those two are not likely a security again This is a gray area by the IR by the sec now we're talking about the sec Okay, because if it's if it's a security then different rules would apply for the iris and those are not likely a security If you invest in any other ico Generally speaking it's considered a security and I emphasize again It's a gray area the sec said we're gonna consider it case by case basis So just fyi whether your currency is a security or not That makes a difference for the wash wash sale Um one let's assume you received one bitcoin and was gifted to you somebody gave it to you So what is your basis because remember you have to know your basis well Theoretically your basis is zero. How much do you pay for something technically zero? Now let me ask you this Do you want your basis to be zero and the answer is no way Because if you have something with the basis of zero, it means whatever you sold it for it's all game So there are special rules as far as tax purposes when it comes to gifts Okay So here's what the rules are if the fair market value of the gift Greater than or equal to to the nor basis on the date of the gift The basis transfer to you. What does that mean? Let's assume The basis the one that gave you the gift the donor bought the bitcoin for 8 000 and the day they gave it to you The bitcoin was worth 9 500 If that's the case if the donor of that if your rich uncle Is giving you this property And that property is a gain Today it has a gain it has an unrealized gain basically a built-in gain Then guess what dirt basis is your basis? Therefore when you sell it when you sell it your basis is 8 000 So if you sold it for less than 8 000 you have a loss if you sold it more more than 8 000 we have a game What happened if your fair market? What happened if the fair market value is less or equal to the nor basis on the date of the gift in this situation? What's happened is your rich uncle is giving you That one bitcoin But on that date the value of the bitcoin is 6 000 your rich uncle bought it for 8 And it's worth 6 in this situation. You might have dual basis and technically like really what we call Triple basis. What does that mean? It means if you sold this asset if you sold this property Okay for more than the original basis. So let's see we have we said let's see this is the This is the basis That your uncle paid 8 000 and this is the Let's erase this. This is the fair market value when your uncle gifted to you 6 000 Okay Now when you sell it what's going to happen when you sell this asset how what's your basis? Is it eight or is it six? Well, here's what's going to happen. Let's assume you sold it for nine So if you sold it for nine If you sold it for nine thousand dollar right here if you sold it for nine thousand Which is about, you know If you sold it for nine thousand your basis equal. This is an error here equal to eight thousand your basis is eight thousand Your basis will be eight thousand Your basis is eight thousand okay If you sold it for six thousand i'm sorry if you sold it for five thousand Let me show you this line here. If you sold it for $5,000, if you sold it for $5,000, your basis is $6,000. Okay, so notice if you sold it above your basis or below the fair market value, your basis becomes the line that's closest to you. Do you notice this? $9,000, your basis is $8,000. If you sold it for $5,000, your basis is $6,000. Now what happened if you sold it in between? What happened if you sold it in between? Let's make this purple. You sold it for $7,000. If you sold this one Bitcoin for $7,000, you are in between the fair market value and the basis. Then in that situation, your basis is $7,000. You have no gain and no loss. Basically, this is the rules for gift, just FYI, so you know how it works in case you are gifted one Bitcoin, because again, that happens all the time. When you start an account, they might give you something with zero basis. Let's talk about mining. Did you mine the cryptocurrency? The first thing we want to know is what is mining? What does mining mean? What are you mining? Well, what does it mean? It means using your computer power, programming and algos to mine, to extract cryptocurrency. Now what you're doing is you are creating the currency. Think of some companies that extract natural resources. What they do is they create oil, as they create petroleum from the ground. What you're doing here is you are creating cryptocurrency. What they do is they find new currency. They create a program to find a new currency. Once they find that new currency, it gets added to the blockchain. You don't really have to worry about the technicality of it, but think of it as they are finding a new currency. Now, what's going to happen is this. Let's assume those two individuals are starting, are starting those two individuals, they are creating one Bitcoin. Well, let's assume they created this one Bitcoin. They find the algos, they created the special keys for this one Bitcoin and they created one unit and that one unit is worth 8,000 today. So they created one, I apologize about this. So they created one Bitcoin and it's worth 8,000 dollars. Now that Bitcoin is added to the blockchain and now it can be traded. It's a new money. Now because they created this one Bitcoin, they'll get a commission. They'll get, you know, for their effort because they created this new currency. They might get, they don't get that much, but just say they, they got 10%. So they got one eighth, actually, let's say 10%. They'll get, they got one tenth of that currency. One tenth means they got 10%. So they got one tenth, they got $800 worth of value today because they extracted it today, they created the new currency and on this day, it's worth 8,000 and because it's acceptable, now it's a new currency. Now it can be traded on, it can be added to the blockchain. They earned $800 for their effort of creating, they created new currency. Okay. Now what happened is this, because they created a new currency, they earned a fee for extracting the currency. Basically this $800 is ordinary income. Basically they, they mined it. They are working for it. They earned it. So you remember the first example when you, when I, when I said, let's assume I am a plumber and I perform the service as a result, I was paid with cryptocurrency, same concept here. I am a programmer and I'm paid in cryptocurrency. So I mined the currency and I paid with that cryptocurrency. But let's just go one step further. Before we go one step further, fears are revenue based on the fair market value of the, of the date received. Let's assume they took this one tenth of a, one tenth of Bitcoin and they bought a computer that's worth $1,000 with it. They exchanged for a computer of $1,000. If they did so, one eighth of a Bitcoin equal to $800 and they received something that's worth $1,000. So they, they would have a capital gain. They would have a capital gain on any profit from that one tenth of a, of a, of a, of a Bitcoin for $200. So first they are taxed on the $800 as ordinary income. Then if they exchange it for a computer, this $200 is considered capital gain, whether it's short term or long term, depending on if they waited a year or not, holding that currency. Okay. So assuming John Doe mined one Bitcoin as a result received one tenth of that currency, one tenth of $8,000 is $800. Okay. So that $800 is ordinary income, but if you take that ordinary income now and you exchange it for a computer that's worth $1,000, that extra $200 is capital gain. Okay. Now remember the revenue from your business, basically you are in the business of mining cryptocurrency, it's subject to self employment on net earnings. So simply put, you have a business, you have expenses, and if you have expenses, you have to pay self employment taxes on the net earning. You could be operating as a scheduled C, SC, court, whatever business you want, you choose to. Let's talk about a little bit more about reporting issues. If you made any payment rent annuities premium using virtual currency, you are subject to information reporting to the same extent as you made payment in cash. And what's the general rule is if you paid someone $600 or more, you have to report to the IRS and to the payee that you paid that individual that much. So if somebody paid me rent, they rented something from me and they paid me $1,000 for that and virtual currency, the virtual currency was worth $1,000 on that date. Whoever paid me will need to tell the IRS, they paid me and they need to tell me that they told the IRS, they paid me $1,000. It's reportable. Same thing applied to independent contractor, if you're an independent contractor and they paid you on a 1099 miscellaneous, they have to report that information. The question is, do they need to have any backup or hold it? Do they need to take any taxes? Well, guess what? If you don't provide a social security or a TIN, tax identification number, then they'll have to withheld federal income tax or if they know by law by the IRS because they have to hold it from you, then they have to do so. Those are reporting issues. One more thing about cryptocurrency is third-party settlement organization. Who are these parties and why do we need to talk about them? Third party that settled substantial number of payment between merchant and customers. Think about PayPal, think about Amazon. Those aren't the companies that we're talking about here or any company that settled payment. So what happens sometimes? Some merchant, what they do, they accept cryptocurrency as payment. And as a result, if they're selling through Amazon, Amazon will have to know about this. So Amazon will have to complete a 1099K, disclosing this information. So when would that third party will have to do so? It's required if they process more than 200 transaction and the gross amount of the merchant is greater than 20,000. So if you sold for more than 200 customers on Amazon and the total proceeds more than 20,000 and Amazon is settling those payments, they'll have to report that information. Now, what does the cryptocurrency comes into place? The fair market value of the cryptocurrency is included because remember we have to determine if you exceeded that $20,000, the fair market value would be included. And now this is a yearly reporting. It's reported per month, but this requirement is four-yearly. So this is what Form 1099K would look like. So you have to have 200 plus transaction and the gross amount has to be 200,000 plus for the third party to report this information. Let's assume for January, they sold this, you know, they Amazon processed $300 for you in credit card payments and you received three Bitcoin. So they have to find out when you received that three Bitcoin, what was the fair market value of, what was the fair market value of the Bitcoin? Sorry, just go back there. So they have to determine what was the fair market value, what was the fair market value of the Bitcoin? Okay, what was the fair market value? And include that information, add the information that your credit card says. Let's assume it's $500. Well, your total for January is $800 and they have to do the same thing for March, May, so on and so forth. They have to let you know and they have to let the IRS knows. This way, they want to make sure the IRS, they want to make sure if you're selling more than $100,000, somebody is, you know, the Amazon is reporting that information to you as well as to the IRS. So basically, again, this is for, let me go back to the beginning and this is for educational purposes. Another tax advice, each situation, each individual is different. Please, if you're interested in an accounting tax or the lectures, if you're a college student, that's what I do for a living. If you're a CPA candidate, I help people pass the CPA exam, go to my website, subscribe to my YouTube, stay motivated. And if you're studying for your exam, your CPA exam, study hard. And I'm pretty sure this topic eventually will be covered on the exam. Good luck.