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In 2016 I was visiting a friend in another country and he asked me to bring him a waffle maker (~$35). He paid me back for the waffle maker in Bitcoin. I sold that Bitcoin in 2020 for ~$740. I believe that I need to declare that on my 2020 US Taxes. I'm looking for advice on how to do this.

Investopedia seems to indicate that if I bought or sold goods to my friend, this money would count as income. I'm not sure that's how I'd characterize the transaction, but I'm willing to go with it. I'm also not sure if that means I need to declare the $35 on my 2016 taxes, or if I should be declaring the $740 on my 2020 taxes, or maybe just $705 on my 2020 taxes? Also, if we think of me as some kind of waffle-maker middle-man, then by bringing the waffle maker across international boarders with the express purpose of selling it (ie getting paid back for it), did I commit fraud?

Maybe since it wasn't really a goods-and-services transaction it needs to be thought of as an investment? I could have sold it right away, but since I didn't... does that make it an investment instead?

I would appreciate advice on how to report this on my US taxes.

Michael
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    "sold that Bitcoin in 2020 for ~$740." A whole Btc, or a small fraction of a Btc? – RonJohn Jun 14 '21 at 13:40
  • I do not know the answer but is there a minimum threshold for what has to be reported? – Freiheit Jun 14 '21 at 13:50
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    Unless you're in the waffle maker business, your original transaction was not a sale. You bought it for him, then he reimbursed you. – Barmar Jun 15 '21 at 02:16
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    @Michael I'd go further than Barmar and suggest even if you are in the business it was a favour for a friend, not a commercial transaction. – Robbie Goodwin Jun 16 '21 at 00:18
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    One suggestion. As you are filing away your tax papers, take everything related to this (maybe even a printout of this discussion, hopefully with the date on it) and put it in an envelope. On the outside of the envelope, describe what's inside and why. Then, if you get audited, pull it out in front of the auditor and say "I thought this might come up - here you go". However, the IRS is pretty happy when you report income that they don't know about; it's unlikely you'll be audited for this (not like the time that I included a "Miscellaneous Deduction: $69,000" on one line on my taxes). – Flydog57 Jun 16 '21 at 00:27
  • Just one question ! I cannot think of *any* country where waffle irons are not freely and immediately available at low cost. Can you say what country it was??? – Fattie Jun 16 '21 at 19:49
  • Waffle iron straw purchase! – Billy left SE for Codidact Jun 17 '21 at 02:30
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    @Fattie Maybe OP's friend wanted a specific model/brand not available in their country, and asked OP to bring one (since OP was going to visit anyway) to avoid shipping cost? – Luris Jun 17 '21 at 11:55
  • By the way Michael, this question was fantastic! Cheers!! – Fattie Jun 17 '21 at 20:03
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    @Fattie, He was living in Kenya at the time, and I was living in The Netherlands, on my way to South Sudan. I think I can safely say two of the three countries listed there don't have readily available waffle irons. :-) – Michael Jun 19 '21 at 09:47

4 Answers4

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It's dead simple.

You made a $705 capital gain in 2020.

You just enter "705" in the "long term capital gains" column in 2020 return.

The waffle/etc. is unrelated to anything, is irrelevant, and has no connection to your tax return in any year. The "Investopedia" article is nonsensical/irrelevant.

Fortunately it's that easy!

Fattie
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    Not if you want to collect the lower capital gains tax rate to which you are entitled. – Harper - Reinstate Monica Jun 14 '21 at 21:31
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    thanks H. I wanted to simplify, since, the spirit of the question seemed to be confusion about whether the "Waffle Incident" had to be reported in some way. – Fattie Jun 14 '21 at 21:39
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    Yeah, you got the crux of it, it's just that it's a fair bit more than a "line" if you want the lower tax rate You'll need a Schedule D and whatever the attachment for that is (though only one line on that mercifully) and also a worksheet to figure the adjusted tax. – Harper - Reinstate Monica Jun 14 '21 at 22:03
  • @Harper-ReinstateMonica - fair enough, great info. You know, I guess the "taxact.com" type systems do make it fairly easy. – Fattie Jun 15 '21 at 11:31
  • Though if you can't prove the 35 dollars anymore, you might want to put in 740 and be safe. – DonQuiKong Jun 15 '21 at 16:13
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    Technically, isn't the $35 reportable in 2016 as barter income (because the IRS says that BTC is property)? I highly doubt the IRS will care about $35, of course. – Kevin Jun 15 '21 at 16:42
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    @Kevin, in my opinion NO, it was SIMPLY A LOAN. X used 35 dollars and X got back the 35. nobody bartered anything. thats MHO ! – Fattie Jun 15 '21 at 17:23
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    @Fattie: I don't see anything in the text of the question about OP giving or receiving any dollars in 2016. So I don't see how you would characterize this as a "loan." OP gave the other person a waffle maker, got some BTC in return, and that would appear to be it. That's a barter transaction. – Kevin Jun 15 '21 at 19:51
  • @Fattie: You seem to be assuming that OP purchased the waffle maker right before departing, but the question does not explicitly say that. It could've been used. – Kevin Jun 15 '21 at 20:01
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    @Kevin - not really, goods in transit are in transit; it doesn't necessarily contribute to an interpretation of them being "used". anyway we can't do any more on this one :) Cheers! – Fattie Jun 15 '21 at 20:04
  • X did not get back $35; they got a Bitcoin with an established market value at the time. The market value (MV) was the cost basis, and max(MV-35, 0) was immediately recognized income. In 2020, the capital gain was 740 - MV. – chepner Feb 05 '23 at 22:00
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Lay opinion:

  • 2016: You did your friend a favour by buying him a waffle maker. Instead of paying you what you paid, he paid you the respective amount in BTC. Or just: you loaned him $35. In other words, you bought BTC from him for $35. You didn't have this amount as income, because that's what you paid for the device.
  • 2020: You sold the BTC which you once bought for $35 for $740. So $35 is your cost basis, you had a (long term) gain of $705. How this is handled, however, is something I don't know.
glglgl
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    https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21 establishes that the IRS considers virtual currencies as property, so you would report the capital gain like you would with any other property (such as stock). – chepner Jun 14 '21 at 13:33
  • Your long-term capital gains tax rate may well be zero. Otherwise, it's probably less than your tax rate for regular income. Since you held the bitcoin for more than a year, this is a long-term capital gain. – David Schwartz Jun 14 '21 at 19:34
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2016

Sales proceeds: $35.
Cost of goods sold: $35.
Business expenses: none reported.
Net income (profit or loss): 0

Reportable income: $0.

No change to tax amount. No need to refile 2016 taxes.

2020

Fill out capital gains form, schedule D.

Acquire date: 2016.
Cost basis: $35.

Sell date: 2020.
Proceeds: $740

Held asset more than 1 year? YES. So it goes under "Long term capital gains" section and tax is lower!

Net gain (or loss): $705

Grind through the math at the bottom of the form and worksheets so you pick up the lower 0-15% capital gains tax rate instead of the salary normal income tax rate. This number just randomly drops into your "Tax." Line on your 1040, almost without explanation. But IRS will recognize what is happening because they have your Schedule D.

Oh, and PSA: it's usually a bad idea to move >200W appliances from 120V-land to 230V-land or vice versa, unless they have multi-voltage power supplies. The cheap adapters intended for cell phone chargers do not work on wafflers and other heat making appliances, forcing you into a $100 step-down transformer. Cheaper to just buy local appliances usually. That said, 230V-land appliances can work in 120V country because 240V is also available and can be wired to an appropriate outlet by an electrician or sufficiently competent DIYer.

Harper - Reinstate Monica
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    Could OP get in trouble if he is asked for receipts for the 35$ cost basis? – Taemyr Jun 15 '21 at 08:43
  • @Taemyr I'd imagine at worst they'd adjust it to 0 cost basis and increase the resulting tax by like $5 – Tristan Jun 15 '21 at 14:49
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    @Taemyr no because I$35 is a perfectly plausible cost basis for a waffler. – Harper - Reinstate Monica Jun 15 '21 at 22:51
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    I've seen an adapter with a diode in it that worked well for any resistive 120v load on 240v. Didn't help with US crypto tax, though. – Rich Jun 16 '21 at 01:34
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    @Rich run that through Ohm's Law, carefully, and a problem with that idea should become apparent. – Harper - Reinstate Monica Jun 16 '21 at 03:13
  • 120V Devices which are purely resistance devices can be operated by cheap converters in 240V countries. The waveform will be wildly wrong but a resistive device doesn't care. Devices containing electronics don't like the cheap converters, though! – Loren Pechtel Jun 16 '21 at 03:26
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    @LorenPechtel sure, resistors don't care over such a short time domain. But the right "cheap converter" for a resistive device will not be the same as for an inductive one, for instance. – Harper - Reinstate Monica Jun 16 '21 at 04:24
  • @Harper-ReinstateMonica Note that I stated purely resistive devices. The cheap converters don't work for anything else. It's just a waffle iron is probably a purely resistive device. – Loren Pechtel Jun 16 '21 at 14:36
  • Bravo for being the only person to point out that you can't use Waffle Irons in a different voltage region. – Fattie Jun 16 '21 at 19:49
  • Waffle iron purchased in The Netherlands (230 European standard) and brought to Kenya (~240). I'm sure it worked just fine. – Michael Jun 19 '21 at 09:53
  • @Michael yes that's fine. 220V-240V are all within design tolerance of each other. – Harper - Reinstate Monica Jun 20 '21 at 01:48
  • Don't forget to report that bounty in '21 ! :) – Fattie Jun 24 '21 at 11:24
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If you want the simplest answer, declare $740 in realized capital gains and pay the taxes on it. This is technically not accurate, as there was the whole waffle maker event involved in your acquiring the bitcoin in the first place. In theory you could fill out the paperwork to properly deduct it and pay less in taxes. But, as you noticed, it's a bit more complicated. (but not too much more complicated)

The IRS never seems to mind being overpaid. Paying taxes on $740 when you could have paid taxes on $705 is safe. You can look to the other answers to see what is involved in properly deducing the cost basis and judge whether you find it is worth your time.

I note that 15% on $35 is $5.25. That's the difference in paying taxes on $705 vs $740. Consider how much time you will spend getting all of the details right, and the value you assign to your labor of filing taxes. Based on that, make your own judgement call as to whether it is worth a more exact filing or not.

Cort Ammon
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