A Word on Cryptocurrencies
Digital assets, cryptocurrencies, and Non-Fungible Tokens (NFTs) have become increasingly popular investments over the last few years. As their value has skyrocketed and their use has become more widespread, understanding cryptocurrency tax rules have become an increasingly important task for investors. This is especially true given that the Internal Revenue Service (IRS) is cracking down on cryptocurrency taxes, recently sending out thousands of letters to taxpayers asking them to review their crypto transactions and declare any income or gains they have earned from cryptocurrencies in recent years. Knowing how to account for digital assets and cryptocurrencies properly can help investors comply with the IRS and avoid unexpected tax bills.
With cryptocurrencies’ value constantly changing, keeping track of all that data could be a nightmare come tax time. But let’s say you are holding on to cryptocurrencies as an investment. You’ve watched the value grow and now want to cash out. If you held those cryptocurrencies for less than a year, you will be taxed at short-term income rates. If you’ve held for over a year, you will be taxed at long-term income rates.
The, short-term and long-term capital gains taxes are going to be applied as follows:
Long-Term Capital Gains Rate
Long-Term Capital Gains Rate
Married Filing Jointly
Head of Household
Married Filing Separately
0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600 15% $38,601 to $425,800 $77,201 to $479,000 $51,701 to $452,400 $38,601 to $239,500 20% Over $425,800 Over $479,000 Over $452,400 Over $239,500
Short-Term Capital Gains Rate
Long-Term Capital Gains Rate
Married Filing Jointly
Head of Household
Married Filing Separately
10% $0 to $38,700 $0 to $19,050 $0 to $13,600 $0 to $9,525 12% $9,525 to $38,700 $19,050 to $77,400 $13,600 to $51,800 $9,525 to $38,700 22% $38,700 to $82,500 $77,400 to $165,000 $51,800 to $82,500 $38,700 to $82,500 24% $82,500 to $157,500 $165,000 to $315,000 $82,500 to $157,500 $82,500 to $157,500 32% $157,500 to $200,000 $315,000 to $400,000 $157,500 to $200,000 $157,500 to $200,000 35% $200,000 to $500,000 $400,000 to $600,000 $200,000 to $500,000 $200,000 to $500,000 37% Over $500,000 Over $600,000 Over $500,000 Over $500,000
Some unique challenges must be addressed regarding accounting for digital assets and cryptocurrencies. The primary challenge is keeping detailed records of all transactions so that any gains or losses can be accurately calculated when filing taxes. Investors must also consider factors like coin basis cost, capital gains treatment for hard forks, zand asset appreciation between two different exchanges, and correctly accounting for various types of tokens such as utility or security tokens. To ensure accuracy when filing taxes related to a digital asset or cryptocurrency investments, it’s best practice to use a qualified Crypto CPA or Cryptocurrency Accountant who understands digital asset taxation principles. Using a professional crypto accountant can help investors establish a sound record-keeping system which will make tax time much easier and ensure that all income from digital assets or cryptocurrencies is reported correctly to the IRS. Additionally, these professionals can guide current events related to crypto taxation and advise on best practices when investing in digital assets and cryptocurrencies.
The Evolution of Cryptocurrencies as an Asset Class
The Evolution of Cryptocurrencies as an Asset Class When we look back on the history and emergence of cryptocurrencies, 2017 will be the year that things truly took off. The total market cap of all cryptocurrencies began the year just shy of 18 billion USD and by the end of the year the total market cap stood at around $245 billion, with Bitcoin owning about 50 percent of the market share and the next closest competitor, Ethereum, at almost 14 percent. Now, as the public interest on cryptocurrencies continues to grow, the lingering question remains: Is cryptocurrency money, a security or is it an asset?
Tax Implications for Cryptocurrencies
Various cryptocurrency transactions have different tax implications. Let’s briefly examine some of them.
This is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for 50 dollars. If that coin was then worth 120 dollars and you bought a 120-dollar gift card, there is a 70 dollar taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
Trading cryptocurrency produces capital gains or losses, with the latter being able to offset gains and reduce ta
Receiving Payments in Cryptocurrency
Receiving cryptocurrency, in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain which is taxable.
Exchanging One Type of Cryptocurrency for Another
A good example is using Ethereum cryptocurrency (ETH) to purchase an altcoin such as Litecoin cryptocurrency (LTC). This creates a taxable event. The ETH is treated as being sold, thus generating capital gains or losses based on the FMV and cost basis of the ETH when you liquidate it to purchase LTC.
Converting a cryptocurrency
Conversion of a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event. This is because it is treated as being sold, thus generating capital gains.
These are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain which is taxable.
The American Bar Association (ABA) Section of Taxation has formally asked the US Internal Revenue Service (IRS) to create a safe harbor for investment gains realized from cryptocurrency hard forks. We are watching developments here closely.
The mining of coins is considered ordinary income and is equal to the fair market value of the coin the day it was successfully mined. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain which is taxable.
Non-Fungible Tokens (NFTs)
Non-Fungible Tokens (NFTs) are digital assets with unique characteristics that differentiate them from traditional cryptocurrencies. They represent various digital art forms, music, collectibles, and other virtual items and have seen a surge in usage and popularity in recent years. The taxation of NFTs largely depends on the country or jurisdiction in which they are taxed. In the United States, the IRS has classified NFTs as property for tax purposes, meaning that any income derived from buying, selling, or creating NFTs is subject to capital gains taxes.
Business Considerations For those operating businesses involving cryptocurrency or non-fungible tokens (NFTs), numerous considerations must be made from an accounting and taxation perspective to remain compliant with applicable laws while maximizing profits where possible. Accounting considerations include correctly valuing digital assets at their fair market value based on current exchange rates at any given time and tracking gains/losses throughout the year (mainly when dealing with goods/services bought/sold using cryptocurrency). From a record-keeping perspective, best practice consists primarily of documenting all transactions after they occur alongside auditable information such as physical receipts & screenshots; this helps ensure accuracy when filing returns & reduces the possibility of penalties due to inaccuracies resulting from poor record-keeping practices being discovered post-facto. It is also important to note that most jurisdictions require reporting within specific deadlines so staying organized & up-to-date throughout the year helps avoid unnecessary stress for filing returns at year’s end.
Record keeping is key when it comes to cryptocurrency accounting and tax reporting. Without proper transaction records and documentation, you will not be able to accurately reconcile and report your transactions. Lack of cost basis information can lead to overpaying in taxes since you will not be able to substantiate your basis in assets for which you have not retained proper documentation. All cryptocurrency exchanges will allow you to download a transaction history report that details every transaction that took place on the exchange. Download this transaction history on a monthly or quarterly basis to ensure you retain proper records. Additionally, keep a list of all wallet addresses and blockchains that you use throughout the year. The IRS Classifies Digital Assets and Virtual Currencies as Property The IRS classifies cryptocurrency and other digital assets such as NFTs as property instead of a currency. It means a transaction involving digital currency, such as exchange or sale, results in capital loss or gain for tax reporting purposes. According to the IRS, if a property’s fair market value (FMV) received in exchange for digital currency exceeds the taxpayer’s adjusted basis, then they have to report taxable gains. For every transaction, the taxpayer needs to compare the virtual currency’s cost basis against the fair market value of the services or goods they are getting in exchange. If the FMV against the cost basis exceeds, it will be considered as income. However, taxpayers can claim a loss if the cost basis exceeds the FMV of the digital asset. The IRS has revised the digital asset question on the 1040. They revised question realted to digital assets that are received to include “gifts”. The other significant change to the question was substituting “virtual currency” with “digital asset.” This change has included NFTs into the scope of the question.
No shrewd upstanding digital currency investor wants to be scrutinized by the IRS. However, in the world of cryptocurrencies it is becoming more evident that this could be a real possibility. While the burden of the blame can be placed on those who fail to report cryptocurrency transaction since it is their duty, some of that burden has to be shouldered by the IRS. How so? Well, the last guidelines that the agency formally provided was way back in 2014. Now, this may seem like just a couple or so years ago but in the world of crypto-assets, a lot of developments occur in just a few months.
The following are some key points that you need to understand about digital currency and cryptocurrency taxes:
- Trading crypto to crypto is a taxable event and thus needs to be recorded. Every transaction, whether crypto to crypto, crypto to fiat or crypto for goods and/or services needs to be recorded and appropriate taxes paid.
- Cryptocurrency is treated as property for tax purposes. Whether you are holding, mining, investing or paying using crypto, you need to record this and appropriate taxation will be applied.
- The rules about cryptocurrency and crypto taxes – especially ones involving like-kind exchanges are murky at best. If you had any substantial activity in the cryptocurrency space, consider hiring an accountant to help you square up with the IRS at tax time.
- As is with other investment properties, the tax implications on cryptocurrencies can differ depending on how the property is treated ‘in the hands of the taxpayer’.
- Capital gains count toward your total taxable income and affect your tax bracket.
- Independent capital losses and capital gains in a year can be written off against each other.
In summary, then this guide has sought to provide essential strategies & tactics for navigating taxation issues related to cryptocurrency activities & non-fungible token transactions specifically; topics discussed have included overviews of relevant legal frameworks along with taxation implications associated with different types of transactions (e.g., buying/selling/creating) alongside various strategies aimed at minimizing liability through careful planning & record keeping practices discussed above.
Here at Camuso CPA, we offer cryptocurrency tax services in Charlotte to clients across the country. Digital currencies are an exciting new currency medium that is fast gaining popularity. However, as a new monetary medium, there is a lot of grey area come tax season. The last thing any good investor wants is to be scrutinized by the IRS, and that is fast becoming a real possibility as cryptocurrencies become more mainstream.
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