Credit Card Rewards Paid In Crypto

[copleyma64]

Hello.  I am a customer of BlockFi and I have their Visa Credit Card that pays out rewards in Bitcoin.  Their 1099-MISC includes these rewards as part of other income.  My understanding was these rewards aren't counted as taxable income until I sell these coins, and only then if a capital gain is realized between what the FMV was at the time of the reward to the time of sell.   Can you clarify the tax requirement wrt to credit card rewards paid in crypto?

Obviously, if i don't report these credit rewards as income on Schedule 1, the total income reported on1099-MISC won't match.  

Finally, if I am correct wrt to not reporting the rewards as income until i eventually redeem the rewarded tokens into fiat cash (and IFF a capital gain is realized), how do I adjust the 1099-MISC income in Turbo Tax to account for this and/or provide a brief explanation my return to inform the IRS of this fact?

Thank you again, Michael Copley

[Opus 17 · Accepted solution]

This may be an unusual situation because I don’t think I understand the full financial relationship between you and the credit card bank and the cryptocurrency transactions.  Let me tell you two general principles and make a suggestion on how I think this could be handled.

1. Credit card rewards and cashback bonuses are considered taxable income if it is the start up bonus, for example, use your card five times the first month and get $500.  After that, your monthly cashback reward is not taxable income because it is treated as a discount of the merchant fee that your credit card bank charges to the merchant. Discounts and fee rebates are not taxable income.

2. If you mine cryptocurrency, you are considered to have income equal to the US$ value of the cryptocurrency on the day it is credited to your account. If you buy or sell or trade cryptocurrency, it is only taxable when you translate it into a different cryptocurrency or into US$ based on the exchange rate for that day.  You generally have to pay tax on any increase in value and you cannot deduct loss in value (although some exceptions apply).

So my thinking is that the cash back rewards should not be included in your taxable income. However, that would mean that your cost basis in those rewards is zero.  For example, suppose you receive $10 equivalent of some cryptocurrency as your reward. Next month or next year, you convert it to a different currency when the value is $12. Because you have no taxable basis in the cryptocurrency, the entire $12 is taxable income.

On the other hand, if you accept the status quo and pay tax on the rewards, then you have a taxable basis.  Suppose you receive $10 in cryptocurrency rewards, and then next month or next year you convert it at a value of $12. Because you have a $10 basis, you only have a $2 taxable gain.

I agree that if you report different income on your tax return that does not match your 1099‘s, the IRS will probably send an inquiring letter.  You would have to respond with an explanation of the situation and a promise to pay tax on the full value of the cryptocurrency when and if you sell or convert it.  Or, you can maintain the status quo and pay tax on the rewards now, and keep track of your basis so that when you convert the rewards later, you only pay tax on any additional gain over the basis.  I have no idea how you would track the basis of fractional cryptocurrency in your account, hopefully there is some software to take care of for you.

Hope that offers some clarification.

[copleyma64]

Indeed, earning bitcoin or some other crypto in credit card rewards is a new and emergent  fin tech thing that crypto companies are offering their customers.  I'm a customer of BlockFI and i have their BLOCKFI Visa that pays out bitcoin rewards monthly, so they do have a FMV (or basis) at time of reward.  I'm inclined to just pay the "interest" taxes and adjust my cost basis down the road when I redeem the coins. 

Given crypto is becoming more and more mainstream, i would suggest to TurboTax developers to account for these transactions in their software so that one can adjust for these things in the income entry.  That said, so do the financial institutions that are preparing the 1099's.  

Thanks very much for the reply and Happy New Year!

[Opus 17]

@copleyma64 

TurboTax does have some functionality to import a .CSV file containing cryptocurrency transactions, but I don’t know how complete it is. One issue may be that the IRS has not really released any official regulations or forms to deal with cryptocurrency, beyond some commentary and a couple of Revenue Rulings.  

And regarding this specific transaction, the credit card bank should probably not be issuing a 1099 for the cash back rewards, and you can’t expect TurboTax to have a built-in procedure to deal with the incorrect tax treatment by a third-party.

cheers

[copleyma64]

Hello again, I have checked my Turbo Tax Import File menu options and do not find a CSV import file option.  I use Quicken and can export my trades into a .TXF format file to import, but not a CSV file.  Can you point me to where I can find this feature in Turbo Tax please? thx Mike C

[MichelleLO]

Please see the below TurboTax Help Article for instructions on how to import a Quicken .txf file into TurboTax.

How do I import from the .txf file?

[copleyma64]

Thanks, but I'm asking specifically about how to import a .CSV file; not a TXF file.  Can you help?

[DaveF1006]

To upload your CSV file, please follow the directions that Turbo Tax Expert Kathryn has outlined in the following Turbo Tax link. In this link, Kathryn has suggested the following steps be implemented to ensure your file gets imported properly.

"It is best to upload the .csv file to your desktop first. Then, save a new copy to change the columns if necessary to match TurboTax before importing.

The columns should be: 

• Service name (examples: Coinbase)
• Asset name (examples: Bitcoin, Ethereum)
• Date of purchase
• Cost basis
• Date of sale
• Sale proceeds

Once you have edited the .CSV file to match this format, return to TurboTax.

Inside TurboTax Online from the search box, enter cryptocurrency. Select the Jump to link in the search results and follow the prompts.

• At Let's get your cryptocurrency info, select any of the tiles and Continue.
  • You must select one of the tiles in order to get to the upload screen. Otherwise, enter each transaction individually.
• At Let's add your cryptocurrency transactions, drag and drop your CSV file."

 Edited 01/03/22|05:49 PM PST]

@copleyma64