@dkysel wrote:
I mean if I buy btc on Localbotcoin and sell it to somebody else, I’m working like an exchange. It’s like on eBay, but instead of goods I buy btc (my business expense) and sell it with my fee (my profit). Will I be able to explain IRS that?
Any time you buy and sell anything, you realize your gains and losses and pay taxes on your gains. You must keep very good records. You mentioned eBay; suppose you go to garage and estate sales and buy items that you re-sell on eBay. You have a capital gain if you sell the item for more than you paid for it. You can reduce the selling price by your costs (shipping charges, listing fees, PayPal fees). Suppose you buy a doll for $5 that you recognize as a collectible, and you sell it on eBay for $100. You pay $3 to PayPal as a transaction fee, $3 to eBay as a listing fee, and $8 to ship the doll. Your net gain on that transaction is $81, that is your taxable income on that transaction. You keep records of all your transactions and pay tax on your gain at the end of the year.
The IRS treats cryptocurrency in the same category of items, the rules are the same as if it was a physical collectible like a doll or a comic book. The only difference is that each transaction must be recorded in the US$ value at the time. Suppose you bought 0.1 btc last Friday at $900 and sold it today at $925. You have a $25 profit that is taxable. If you paid transaction costs on the exchange of $1, then your taxable profit is $24.
If however, you bought btc last week, and today you trade it for etherium, and next week you sell the etherium for cash, you have to report that as two separate transactions; Btc to Eth where the profit or loss is determined by the US$ price for Btc on the day of the buy and sell; and then Eth to US$ where the profit or loss is determined using the US$ price for Eth on the day of the buy and sell. (This requirement to record all trades in US$ makes arbitrage subject to more tax than it might otherwise.)
The exchange you use might send a 1099-B or make a report available with the same information, but you have an absolute requirement to keep your own records. Because if you get audited, and the IRS sees a payment in your checking account of $925 for the sale of 0.1Btc, they will tax that as 100% taxable unless you can prove that you originally paid $900 for it.
