Here’s What You Need to Know About Bitcoin Rewards and How They Are Treated by The IRS
By Shehan Chandrasekera, CPA, Head of Tax Strategy at CoinTracker.io and Aubrey Strobel, Head of Communications at Lolli
You may be wondering about all the sats you racked up this past year shopping online and earning free bitcoin with Lolli.
Are bitcoin rewards taxable income? In this blog post, we break down the intricacies of how bitcoin rewards are treated this tax season so that it's simple and easy for you to file this year.
Cryptocurrency Tax Basics
Cryptocurrencies like bitcoin are treated as property per IRS Notice 2014-21. Notably, the IRS does not tax bitcoin like fiat currencies such as Dollars and Euros. This means that there is a capital gain or loss you have to report on your tax return when you sell/trade/dispose of your bitcoin.
Receiving Bitcoin Rewards
When you use Lolli to buy something online, you are rewarded with a bitcoin reward. The IRS has not issued any direct guidance on how bitcoin rebates are taxed. There is however guidance which allows us to infer how bitcoin rewards from Lolli should be taxed.
Lolli bitcoin rewards work like a rebate, or a cash back from a credit card. Generally, rebates are not taxable because they are an adjustment to the purchase price paid for the item and not additional income. In tax law terms, this is not an accession to wealth and should not be included in your gross income. This is good news for Lolli users!
Although there are no taxes to be paid when you receive bitcoin rewards from Lolli, it is critically important to keep track of your bitcoin reward history because you will be taxed if you ever trade, spend or convert them into another currency (e.g. USD, ETH, etc.).
Cashing Out Bitcoin Rewards
When you cash out your bitcoin to another currency like US dollars, you trigger a taxable event. This is because in the eyes of the IRS, you are selling a property and receiving US dollars. Taxes are incurred on the difference between the cost basis of the bitcoin (the price at which you got them) and the fair market value (the price at which you sell them).
For example, imagine Matt receives 0.005 BTC from Lolli on February 25, 2019. On this day 1 BTC is priced at $10,000. The cost basis of Matt’s 0.005 BTC is therefore $50 ($10,000 x 0.005). Then on June 6, 2020, Matt wants to cash out his BTC when the price has gone up to $15,000. In this case, he will have a capital gain of $25 ($75 – $50). If Matt held the BTC for more than 12 months, it will be long term capital gains which has a more favorable tax rate. If Matt held the BTC for less than 12 months, he will be taxed at his ordinary income tax rate.
This is a simple example, but calculating the cost basis and capital gain every time you spend or convert your sats can be time consuming & tricky, especially if you are a busy shopper. Luckily, there is a simple solution.
CoinTracker to the Rescue
CoinTracker automatically tracks your cost basis and produces all the tax forms you need to be cryptocurrency tax compliant. Best of all, it is integrated with Lolli so you can simply import your Lolli transaction history CSV directly into CoinTracker and rest assured that your cryptocurrency portfolio is tracked and your taxes are calculated. As a cherry on top, it is completely free to use if you have 200 or fewer transactions in the tax year, and Lolli users get a 10% discount on premium tax plans: http://www.cointracker.io/a/lolli.
To access your Lolli tax information, please follow the steps listed in this blog.
UPDATE: Treasury Secretary Steven Mnuchin announced tax day will be delayed from April 15 to July 15. He made the announcement in a tweet, days after announcing a deferral on tax payments.
“All taxpayers and businesses will have this additional time to file and make payments without interest or penalties,” Mnuchin tweeted.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.