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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.

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    "sold that Bitcoin in 2020 for ~$740." A whole Btc, or a small fraction of a Btc?
    – RonJohn
    Jun 14 at 13:40
  • I do not know the answer but is there a minimum threshold for what has to be reported?
    – Freiheit
    Jun 14 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 at 2:16
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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. Jun 16 at 0:18
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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 at 0:27
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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!

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    Not if you want to collect the lower capital gains tax rate to which you are entitled. Jun 14 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 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. Jun 14 at 22:03
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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 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 at 17:23
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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.
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    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 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. Jun 14 at 19:34
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+100

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.

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    Could OP get in trouble if he is asked for receipts for the 35$ cost basis?
    – Taemyr
    Jun 15 at 8:43
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    @Taemyr no because I$35 is a perfectly plausible cost basis for a waffler. Jun 15 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 at 1:34
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    @Rich run that through Ohm's Law, carefully, and a problem with that idea should become apparent. Jun 16 at 3:13
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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. Jun 16 at 4:24
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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.

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