I was wondering if trading bitcoin for cash (for example payments on Apple Cash, Venmo or Zelle) is legal in Virginia (USA) or not. I would like to know before I start selling some of my bitcoins.
Why do you think it wouldn’t be legal to sell what you own?– Dale M ♦Jan 7, 2020 at 8:00
3@DaleM What if it were cocaine, or Vicodin, etc. instead?– zibadawa timmyJan 7, 2020 at 9:14
4@zibadawatimmy "What if it were cocaine, or Vicodin, etc. instead?". That is not a good analogy. Bitcoin does not require prescription for possession to be lawful.– Iñaki ViggersJan 7, 2020 at 14:55
@IñakiViggers neither does cocaine as far as I know– J_riteJan 8, 2020 at 7:37
@Jungkook "neither does cocaine". Griffin v. Pate, 884 N.W.2d 182, 203 (2016) is in terms of possession of cocaine without a prescription. Similarly U.S. v. King, 587 F.2d 956, 965, 967-968 (1978) and State v. Erickson, 574 P.2d 1, n.69 (1978). But let's not miss the point: Owning bitcoin is not illegal, whence questions about illegal or controlled substances sound rhetorical and are unrelated to the OP's inquiry.– Iñaki ViggersJan 8, 2020 at 9:29
The short answer is that a few individual trades would be legal (e.g. if you sell some to a friend), but doing so on a regular basis for profit (e.g. offering a sale price and a bid price to all comers) would not unless you get the appropriate licenses and comply with relevant laws. Doing this is onerous.
Any kind of "money services business" is subject to federal regulation. The federal definition is a business trading more than $1,000 per day, so in theory as long as you keep below that you wouldn't have to worry about federal law. In practice you might find yourself having to prove to the Feds that you have not exceeded the threshold on any day in the past.
There is also a separate licence regime for Virginia which you must also comply with.
Finally, if you sell Bitcoins to someone when you have a reason to suspect that they are planning to do something illegal with them then you are breaking the law.
Edit: While its not strictly a legal issue, some people who have traded Bitcoins outside of recognised exchanges have had their bank accounts closed because the activity has triggered the bank's money-laundering detectors.
Edit 2: All the above applies if you are trading directly with people who you found on something like localbitcoins.com. Trade via an exchange such as BitStamp is legal: all the AML and KYC regulations are their problem not yours. You merely have to provide the necessary identification to open an account.
4The OP intends to sell his bitcoins (which he seemingly has owned for a while) rather than operate as a de facto exchange/check casher/etc with high rotation of cryptocurrency. Only in the latter case a license would be required. For instance, when you cash your paycheck, you are not offering money services. With bitcoin and other assets it is similar. Accordingly, the threshold of $1,000 per day is inapplicable to the OP. Jan 7, 2020 at 14:51
1@IñakiViggers The OP is ambiguous, so I thought it better not to jump to conclusions. You are of course correct about someone who is merely selling their existing holdings. Jan 7, 2020 at 15:13
Thanks for your answer, and yes I said in the question trade/sell, that means yes sometimes I sell for a friend once in a while, and sometimes I trade on exchange for profit, that made so much clear– solidJan 7, 2020 at 16:16
Here's the official guidance, clear as mud: "A natural person operating as a P2P exchanger that engages in money transmission services involving real currency or CVCs must comply with BSA regulations as a money transmitter acting as principal. This is so regardless of the regularity or formality of such transactions or the location from which the person is operating. However, a natural person engaging in such activity on an infrequent basis and not for profit or gain would be exempt from the scope of money transmission." (The guidance makes clear that exchange is money transmission.) Jan 8, 2020 at 6:58
@HusseinElbeheiry See my second edit in response: I just wanted to make clear that trading on an exchange is legal, as all the regulations apply to them not you. Jan 8, 2020 at 10:12
Is it legal to sell/Trade Bitcoin for Cash in USA, Virgina?
Yes. Your mention that you want to "start selling some of [your] bitcoins" conveys that you have owned the bitcoins for a while. That falls short of the meaning of money business service, where a license would be required. See also this answer.
From legal and practical standpoints it might be safer for you to cash out via an exchange (meaning a licensed one), especially if you intend to sell many bitcoins. The exchange and/or your bank might gather from you information for purposes of KYC (Know Your Customer) compliance.
You will also need to file your taxes properly
The IRS and state will view this as a sale of a security. Any capital gain must be reported on your taxes, i.e. your normal Form 1040 that you file before April 15.
You'll need to add Schedule D to your tax forms.
Also, if this is a significant surge of income (e.g. more than a whole paycheck), you may need to prepay withholding in that quarter, with one of the coupons in Form 1040-ES.
For best advantage, you need to be able to state the date you obtained the Bitcoin, the USD cash value you paid for it (cost basis), the date you sold and the cash value you got. If you bought the Bitcoin in several batches, then each batch is a separate "lot" requiring a separate line item.*
That is because you pay very different tax rates on securities you held more than a year vs less than a year.
Refusing to report income is what they got Al Capone for
So you have to report the capital gains, or it's tax fraud.
If you don't have all the info, well, if you don't have records of your cost basis, then you report cost basis of 0 and pay tax on the entire sale amount. If you don't have records of the purchase dates, then you put "unknown" and report it as a short term capital gain, at the much higher tax rate.
This applies to each tax lot individually. So if 4 tax lots made money and 7 lost money, you must report the 4 that made money.
It is not essential to report capital losses, but you waste an advantage if you do not; it would be like throwing away 10-33% of the losses. Capital losses can offset (pay the taxes for) future capital gains, plus $3000 of regular income, and if you don't have enough capital gains this year, they can be carried forward to a future year when you do.
Tax lot example. Suppose you bought 3 BTC on January 2018 and 1 BTC on July 2018. You sell 1 BTC on February 2019 and 3 BTC on December 2019. Which is which?
- You can call that 2 tax lots, but the 1 BTC transaction only holds the Bitcoin for 7 months, so you pay the higher short term capital gains tax rate.
- Or you can handle it FIFO, and then you get 3 tax lots: 1 BTC for 13 months, 2 BTC for 23 months and 1 BTC for 17 months. More complicated, but all long term capital gains.
Capital loss example. Suppose you got creamed in DogeCoin in 2017, suffered a $20,000 loss, never reported it on your taxes, but still have the docs. Suddenly you realize. So you
- amend your 2017 taxes to take that capital loss of $20,000. You didn't have any other capital gains that year, so you deduct $3000 off your income, reducing your 2016 tax, and roll the $17,000 loss to 2018. IRS sends you about a $650 check, with interest.
- amend your 2018 taxes, ditto ditto $14,000.
- ditto ditto all your state taxes.
- In 2019 you have $12,000 of gains on your Bitcoin sale. The $14,000 wipes out your $12,000 gains, so you pay no tax on them (you paid the tax in 2017). And you take the remaining $2000 off general income.
- No tax on the BTC sale, and 4 checks show up totaling nearly $2000. Not bad! I love the 1040X!
Thanks a lot for that, but I thought you don’t file taxes until your income exceed 25k per year ? If this is wrong let me know, and does that work also in short term ? For example bought a 0.001 BTC today, and sold it for 0.0015 tomorrow? Will that require an instant tax lot ? Or save them all at once ?– solidJan 7, 2020 at 17:36
3@Hussein Oh dear, that's wrong! Don't take advice from morons, except from licensed tax accountants you hired (in which case IRS waives penalties, but not the actual tax). Your best bet is get the Form 1040 Instructions and read the "Who Must File" section, ditto state of Virginia. That sounds like 1 tax lot, yeah, so 1 line item in your "short term capital gains" section on Schedule D... unless you already hold BTC, in which case FIFO will probably get you a bigger paycheck on tax day. Jan 7, 2020 at 17:59
1@HusseinElbeheiry Income definitely does not have to exceed $25k/yr in order to be required to file a tax return.– reirabJan 7, 2020 at 23:25
For single people not dependents of anybody else the filing threshold is 12,200 for 2019 taxes. If you are somebody's dependent it is 1050 of unearned income. The income is the gain on the sale, not the gross amount of the sale. The thresholds are total over the year, no matter how many tax lots there are. Jan 8, 2020 at 4:56
"No tax on the BTC sale, and 4 checks show up totaling nearly $2000. Not bad!". Yehbut you lost $20,000 on your DogeCoin - you may have now clawed back $6000 of that back, but you are still $14,000 in the hole. Jan 8, 2020 at 9:07