IRS tax treatment for cryptocurrency

[deathandtaxes]

IRS treatment of Cryptocurrency? Received $4000 FMV worth of crypto in Q1 2018 for goods and services I provided to a client. Traded the the crypto throughout the year as an attempt to make additional profit from speculation (~15 trades). Cashed out and sold the same crypto for $1000 FMV in Q4 2018. For Canadian tax purposes im treating the crypto I received as business income with the crypto itself as inventory (instead of capital) so the disposition would be a inventory loss instead of a capital loss.

The above scenario would be: $5000 in sales ($4,000 for the work I did + $1,000 for the proceeds of selling the bitcoin), $4000 in purchases (the cost of the bitcoin received) and an ending inventory of $0

Can I do the same on my IRS taxes? I would include the proceeds of these trades on an additional Sched C.

EDIT: Im dual and required to file taxes in Canada and USA

[deathandtaxes]

I hope I can treat it as a business loss instead of investment loss.

Normally its a capital loss in Canada like the US but after further research and CPA advice I can treat the crypto as business inventory with citation to "Adventure or Concern in the Nature of Trade" notabley lines 13-15 here: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it459/archived-adventure-concern-nature-trade.html

If I had to report it as a capital loss in Canada instead of inventory loss I would be paying $2000 in tax on $4000 of business income (even though I only actually received $1000 after selling all the crypto).

Im hoping I can get additional opinions from others before I decide what to do.

Treating it as an investment loss will make things much more complicated to say the least. US and CA also track stock values differently (FIFO/LIFO vs Canada's Adjusted Cost Basis "ACB").

[secondcor521]

IRS notice 2014-21 looks applicable:

https://www.irs.gov/pub/irs-drop/n-14-21.pdf

[deathandtaxes]

Ive previously read this but its like reading gibberish. Ill just report as capital loss and deduct from income. On my canadian taxes ill report as inventory and treat the crypto as inventory.

[ladydi]

For US tax, you have a couple of transactions.  First, you have the payment for your services.  You will show $4,000 (fair market value of cryptocurrency received) as gross income.  (See Q-3 of Notice 2014-21.)

After that, you held the cryptocurrency as an investment. Your cost basis was $4,000, and you made 15 trades on the cryptocurrency.   You ended up netting $1,000, and your cost was $4,000, so you have a capital loss of $3,000.  The capital loss is short-term if held less than a year.

[deathandtaxes]

Correct. This is the position Ive taken. And up to $3000 capital loss can be deducted from other income types. For Canadian tax purposes im treating the capital loss as inventory (COG) as advised by a Canadian CPA. In all: I accepted bitcoin (barter) for payment as a business. I made a loss from trading it.

The problem im at now is Im getting a total FTC greater than my US taxed owed (and im not referring to excess which are for carryovers) and trying to troubleshoot. Ill go through all my numbers again tomorrow.


If you are interested here are my other forms:

[ladydi]

I think the interest income on the Form 1116 may be wrong. 

Self-employment income per Form 1116 (agrees with Sch C #1 + Sch C #2)  = 77,139.96
Interest income per Form 1116                                                                         2,134.04
Total foreign income reported                                                                            79,274

Total income reported Form 1040 ($1,130 less than Form 1116)                             78,144

That's my take.  Hope it helps.

[deathandtaxes]

The interest income on Form 1116 is correct.

net US source interest income (Bank bonus, not taxed in Canada): $1349.81
net Canadian source interest income: $2133.04 (only $1876.10 was taxable by Canada)

Total interest income was: $3482.85

The $1349.81 of US source interest income is taxable by the united states. My US tax liability is $9728. After calculating the FTC's its my US tax liability is $0. I should owe tax on the US source income so I am doing something wrong. Im going over the numbers again and cant figure out what I did wrong.

I believe it may be something to do with the capital loss.