This post was originally posted on Forbes by Shehan Chandrasekera on March 4th, 2020
Currently, there are several platforms in the e-commerce space which will reward you in bitcoin when you purchase products or services from a list of specified vendors. A quick google search for “bitcoin shopping rewards” would show you some of these platforms. These work similar to credit card cash back programs, but the rewards are paid out in bitcoin. A deeper dive into the taxation of shopping rewards & rebates (see footnotes) show that bitcoin rewards may not be taxed at the time of the receipt.
Cryptocurrencies like bitcoin are treated as “property” per IRS Notice 2014-21. They are not treated like currencies, like USD or Euro, by the IRS. This property treatment generates capital gains or losses when you dispose of them. It also requires you to track the cost basis of each coin when you receive them.
Bitcoin Rewards May Not Be Taxable
When you check out through bitcoin shopping reward platforms, you get a small percentage of bitcoin credited to your wallet. The bitcoin reward is a percentage of the purchase price. As with many cases in the crypto world, the IRS has not issued any direct guidance on how rebates issued in bitcoin are taxed. However, there is enough guidance issued in the non-crypto world to infer how bitcoin shopping rewards should be taxed.
It is reasonable to assume that bitcoin shopping rewards work more like a rebate or a cash back. Generally, rebates are not taxable because it is an adjustment to the purchase price paid for the item and not additional income. Technically speaking, it is not an accession to wealth and should not be included in your gross income to be taxed. This is generally the same reasoning why your credit card cash back and other rewards are not taxed.
Although there are no taxes to be paid when you receive bitcoin rewards, It is really important to keep track of the cost basis of these bitcoins at the time you receive them. Cost basis means the USD value of bitcoins at the time they are credited to your wallet. You will see why this is important in the next section.
Cashing Out Bitcoin Is Taxable
When you cash out your bitcoin, that will create a taxable event. This is because in the eyes of the IRS, you are selling a “property” and receiving USD. You are taxed on the difference between the cost basis of the property and the sales price. The IRS has been very clear about this part.
For example, imagine you received 0.01 BTC from Platform A on February 30, 2020. On this day 1 BTC is trading at $10,000. The cost basis of your 0.01 BTC is therefore $100 ($10,000 x 0.01). Assume on June, 6, 2020, you want to cash this out when the price of a BTC is $15,000. In this case you will have a short term capital gain of $50 ($150 - $100) because you held the BTC for less than 12 months. If you held the BTC for more than 12 months, it will be treated as long term capital gains and taxed at more favorable rates.
Getting rewarded in bitcoin compared to cash or travel miles is more tempting to users because bitcoin has a potential to go up in value. Bitcoins earned as shopping rewards are not taxed until they are sold. Finally, there is no direct tax law governing how rebates should be taxed (even for traditional credit card rewards).
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional. Reach out to us @cointracker