“Cryptocurrency” — the very name sounds mysterious. When it comes to cryptocurrencies such as Bitcoin and Ether, and their use in transactions such as the purchase of new vehicle, that sense of ambiguity remains, even for tax professionals. However, with the rise in use of these cryptocurrencies, it is important that auto dealers begin to understand the U.S. tax treatment of cryptocurrencies for balance sheet and compliance purposes.
Cryptocurrencies have evolved into a “virtual currency” that anyone can buy or sell through online exchanges. As such, their values may fluctuate wildly, making them attractive to investors. They can be traded, bartered or exchanged for fiat, services or other cryptocurrency. They can also be “mined” on the internet using complex algorithms and specialized computers.
Yes, cryptocurrencies can be traded for fiat. Fiat is a currency which is backed by a government and whose value is determined by the financial strength and stability of that government. But, can cryptocurrencies be traded for a Fiat, as in the type of car? Yes, for a Fiat, a Bentley, a Ferrari, or any other brand of auto, so long as the dealership is willing to accept cryptocurrency as a form of payment.
For accounting purposes, the sale of the car using cryptocurrency as payment, could be calculated in various ways, including:
- List price of the car.
- FMV of the cryptocurrency at time of the sale.
- US Dollar deposit amount upon timely conversion out of cryptocurrency.
Once a method is selected, that will be the method of accounting going forward, for income tax purposes. If a dealership were not to convert the cryptocurrency to fiat, any subsequent gain/(loss) could be considered investment income.
Other News From the Cryptosphere Related to Autos
Beyond being prepared to deal with cryptocurrencies as a form of payment for vehicle purchases, there has been some other interesting news recently about how cryptocurrencies will likely impact the way we actually drive.
On May 27, 2018, Ford Global Technologies, LLC (Ford) was awarded a new patent for a specific type of Crypto Transactions. The patent called “Vehicle-to-Vehicle cooperation to Marshal Traffic” (patent) will introduce technologies which allow vehicles to identify as either a “consumer vehicle” (a car willing to pay others to yield) or “merchant vehicle” (a car willing to yield for pay). Vehicles with the necessary equipment/software will participate in the Cooperatively Managed Merge and Pass system (CMMP) and negotiate payments in CMMP tokens. According to the patent documents, “The CMMP system facilitates particular drivers accessing less congested lanes. Drivers with cooperative vehicles may choose to participate in the system in which driving behavior is monitored, recorded, and evaluated in a collective manner by themselves and other participating vehicles.” This basically sets up a kind of “on demand” ability to use “express lanes” based on live traffic patterns.
In another example, in February, 2018, Daimler AG announced that it will collect the driving data of 500 drivers and reward eco-friendly drivers with MobiCoins. At time of publication the value of a MobiCoin is unknown.
This is only scratching the surface of how cryptocurrencies — as they become more prevalent in the years ahead — may impact driving habits and our day to day vehicle use.
How Does the IRS View Cryptocurrencies?
As auto dealers may soon have to consider accepting cryptocurrencies for payment, it is important to understand how they are viewed by the IRS. In 2014, the IRS released IRS Notice 2014-21. It declared that for U.S. income tax purposes, a cryptocurrency is property and not a currency. Depending on the facts, that means the character of the cryptocurrency could be business property, investment property, or other property. Therefore, the general U.S. tax principles that apply to any property transaction should be applied to exchanges of cryptocurrencies. Cryptocurrencies, held for investment, and sold for a gain are subject to short term or long term capital gains tax. Conversely, those investment-held cryptocurrencies sold for a loss are able to utilize a capital loss.
The IRS notice does not resolve all issues related to reporting requirements or taxation. Some of the unresolved issues are:
- Foreign account reporting
- Cryptocurrency as “like-kind” exchanges
- Taxation of Crypto-forks
FBAR Reporting – Under the provisions of the Bank Secrecy Act, U.S. persons holding “offshore bank accounts” in excess of $10,000 in a given tax year are obligated to report those assets on a Report of Foreign Bank and Financial Accounts (FBAR). As Bitcoins can be deposited and held in a foreign account, when they are, are they “currency” and subject to FBAR reporting? The current guidance put out by the IRS is vague on the matter. At the initial issuance of Notice 2014-21, the agency seemed to indicate that cryptocurrency accounts were not reportable under FATCA regulations. However, since then, more recent enforcement actions taken by the IRS would seem to indicate that the agency is reconsidering the need for FBAR disclosures.
Cryptocurrency Mining – A business involved in “cryptocurrency mining”, which is the use of sophisticated algorithms and computer programs to verify crypto-transactions and thereby change the value of the coin, or create new coins, would have to recognize income according to the value of the coin when received.
Crypto-forking – Cryptocurrencies can “fork,” or split in two. When a cryptocurrency forks, the result is two distinct coins, with two different ledgers, and different unique sets of code, but both originating from the blockchain. Can this be looked at the same way as a “corporate spinoff” for taxation purposes? Probably not. As stated earlier, the IRS treats crypto-coins as property, and not stock. However, in the absence of any guidance as of yet from the IRS, all facts and circumstances should be discussed to determine if gains made from such forks, such as last year’s hard fork of Bitcoin into Bitcoin Cash, are considered taxable income.
How MBAF Can Help
These are just a few of the issues facing auto dealerships by the increasingly popular use of Bitcoin, Ethereum and other virtual currencies. Here at MBAF, we will continue to closely monitor the growth of cryptocurrencies, and watch for new regulations that may come to bear regarding their use. As new regulations regarding the use and taxation of cryptocurrencies come into effect, our tax and accounting experts will be able to help you modify your tax and accounting strategies to protect your profits, as well as ensure compliance with any new regulations.