Does my tax return need to report cryptocoins that I have received as donations?

Question

I have received a relatively small amount of the IOTA cryptocurrency as a donation. A reason for this donation is that sending such transactions helps in testing the IOTA network and transaction processing and that with some of the currency I will be able create such transactions on the network.

The total value of these coins is currently at less than $5000 USD according to the price listed here.

I do not know if it matters for my question but, currently the IOTA coin cannot be directly traded on any U.S.-based exchanges.

The question I wanted to ask is, do I need to list these coins in my 2017 tax return, and is this the case even if I donate them to someone else before the end of the year?

Answer 1

I think it'd be hard to claim these were a gift if you received them as part of some network testing exercise, you may not have done much for them but it sounds like you did something of value (setting up an account/wallet to help them?).

Assuming the IRS agrees that these aren't a gift, you have taxable income. The amount of income is the value of the coins in USD at time of receipt, not current value. If you sell the coins you'll have a capital gains event where you'll report the difference between basis (value when recieved) and sale price as capital gain.

If, after you count them as income, you give them away that is not of interest to the IRS unless the value given to one individual exceeds $15,000 in which case a gift-tax form (Form 709) would be filed, or you give them to a registered 501(c)(3) organization in which case a charitable contribution can be claimed.

Answer 2

You did not receive a "donation." You did something of value and received something of value in return. No different, in my opinion, than if my dentist gave me a new crown and I tutored his kid so she could pass calculus in high school.

Maybe different in that what you received wasn't a service, but a cryptocurrency that can presumably be valued. If you wish to comply with the US tax code, it needs to be reported.

In response the the updated question and comment, I suggest OP read How should I handle taxes for Minecraft server donations? I maintain my position that the income is taxable. And spending it elsewhere or giving it away doesn't really change that.

Answer 3

There are two possibilities, and you may need to consult with a tax professional to determine which one applies. If you don't wish to do that, it should be okay to treat them as compensation. You will probably wind up paying taxes sooner and might pay a bit more.

If you can really consider them a gift, given out of generosity and not as compensation:
1. No taxes are due until you sell them. You do not need to list receiving them as income.
2. Your tax basis is the giver's basis. If you don't know this, you must assume zero.
3. You will have to pay tax on any gain when you sell them. You may have to pay taxes if you dispose of them in other ways too, but that gets complicated.

If you have to consider them as compensation for services:
1. You must treat their fair market value as income and report it.
2. It may have to be considered self-employment income and SE taxes may be due.
3. Your basis when/if you sell them will be the amount of income you declared.

CAUTION: A very common tax mistake is to assume that because no taxes are due on receipt of a gift, that means no taxes are due when you sell a gift. Another common tax mistake is to assume that your basis in a gift is its fair market value when you received it. Neither of these things are true. Your tax basis in a gift is the giver's basis (unless you inherited it). If you don't know this, you must assume zero. When you sell a capital asset you received as a gift, you have a taxable gain equal to the difference between what you sold it for and your tax basis.

Answer 4

A reason for this donation is that sending such transactions helps in testing the IOTA network and transaction processing and that with some of the currency I will be able create such transactions on the network.

Is it a donation? Or a loan? Or payment for services rendered?

If you are not a registered charity, then donations are certainly income. If you are a registered charity, I'm not familiar with the rules. But you don't say that you are a registered charity.

If someone loans you money so that you can test transaction creation and processing by giving them the money back, then that is not income.

Some important things to remember:

1. If it is a loan, you have to pay it back.
2. It's easier to demonstrate a loan if you have a signed document before you start that sets out the terms.
3. If you get a personal benefit from the money, e.g. you buy groceries, then it is hard to argue that it is a loan for testing. It is much easier if the transactions do not benefit you in any direct way. Indirect in that they allow you to perform your job of testing is fine.
4. It's easier to argue that it is a loan if you pay it back to the original giver. In fact, that might be a great opportunity to test the refund facility. Unwind each transaction by refund.

Of course, this whole thing might be even more easily done with a fake account to which you have access. The fake account could belong purely to the owner, so they don't give you money. They just give you access to trade the money.

TL;DR: unless you are a registered charity, don't call this money donations. Perhaps loans would be a better term.