Paying with Bitcoin
EDITOR'S NOTE
Can I tell you something I've been thinking about, as more and more shops and restaurants are adding the option for you to pay in Bitcoin?
Why would anyone ever do that?? It's a taxable event!
If you pay your $40 restaurant bill in Bitcoin, the IRS treats that as a sale and taxes the capital gains accordingly. Congratulations, your $40 bill now costs $40 + your tax bill! This makes zero sense for anyone to do when they're sitting on gains in their holdings, unless you simply want to sell for other reasons and are choosing to do so in this way.
You know when people should actually pay with Bitcoin? When they've lost their shirts on it. Because then you can at least deduct the losses (up to $3,000 a year typically) from your tax bill. But I wonder how many people realize that anytime they pay for anything with crypto, it's equivalent to selling it (and it has to be reported), and the thing they bought just cost them more than it would have otherwise.
So I just don't see why "paying with crypto" should ever become a big usage case. This is why the whole term "cryptocurrency" is problematic--it's really crypto-property. That said, people who have made big gains on their crypto holdings obviously want to benefit from that in some way--and the main way to do so is the way people used to use their houses as ATMs. You tap the "equity," so to speak, by taking out a loan against it.
This is why home equity lines of credit exploded in the early '00s. It all worked beautifully so long as home prices were rising--when you sold, you used the gains to repay the loans and you were able to use the cash in the meantime. Same for crypto. All the people (and lenders) now excited by the prospect of taking cash out against their crypto holdings are wise to do so until or unless the price collapses and they can't repay those loans.
And if you're thinking, hey wait, I've paid for stuff in Bitcoin before and never had an IRS problem, well, your time might be up. A federal court has just authorized the IRS to seek the identities of taxpayers who have used crypto on the exchange Kraken from 2016 to 2020. They're starting with taxpayers who conducted at least $20,000 worth of transactions, but the larger point is that the crackdown on those who have sold or exchanged their crypto without reporting it is clearly underway. We'll be discussing this with Eamon Javers in Power Lunch today.
There is one interesting wrinkle to all this, however: people who generally make less than $40,000 a year don't typically have to pay capital gains tax. So a college student with big crypto gains and little income might gladly pay for stuff with Bitcoin--that is, if they really want to part with it.
But for anyone hoping to avoid capital gains tax--especially if Biden hikes it--by converting their Bitcoin into gold, property, or otherwise, just remember: converting your Bitcoin or Ether or dogecoin into anything is the same as selling it. And the tax man will inevitably cometh.
See you at 1 p.m!
Kelly KEY STORIES
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