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Cryptocurrencies

Important Wash Sales Update for Cryptocurrency Investors and Traders

Here at Camuso CPA, we offer a wide array of tax services for investors including tax preparation and tax planning. Financial service and technology companies are transitioning from employee driven revenue models to information driven revenue models. Camuso CPA strives to deliver useful insights and offer relevant explanations about the latest tax and financial topics.

This indication by the SEC has implications investors may not first consider from a tax perspective. Since cryptocurrencies are generally classified as property, wash sale regulations should not currently be a concern for investors. This means investors can sell an investment to realize a tax loss, only to buy it back immediately thereafter at a bargain.

Today, wash sales only apply to stocks and securities, since Bitcoin and Ethereum have not been labeled a stock or security, the IRS can only tax traders for non-economic substance transactions under property rules. These transactions are similar to wash sales, considering the volatility of crypto markets and the potential argument that investors made late trades in response to market-moving news as opposed to tax motivations, traders have a legitimate position on the matter.

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If you searching for CPA firms to assist you with reporting cryptocurrency income and capital gains, contact Camuso CPA. Whether you need tax preparation services, assistance with properly reporting gains and income from virtual currencies on your taxes, cryptocurrency portfolio analysis, or any other service provided by a certified accountant, Camuso CPA can help.

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CRYPTOCURRENCY TAX RETURNS: SHOULD YOU PREPARE YOUR OWN?

Many people have reaped some serious rewards from their cryptocurrency investments. It’s a lucrative new monetary medium that many people are getting behind. But because it is new, it becomes harder to navigate when tax season comes around. Taxes can be hard enough to understand when you are dealing with normal income, and many people end up leaving money on the table. Mistakes become much more likely when dealing with cryptocurrencies, so we make the argument that filing cryptocurrency tax returns should be left up to the professionals. Here’s why.

IT’S GOING MAINSTREAM

Cryptocurrencies, especially the big ones like Bitcoin, are becoming more mainstream than ever. That means that the IRS is cracking down on them come tax season. While many have been able to under report their virtual currency assets in the past, this practice is fast becoming inviable. In fact, the IRS has recently filed a suit in court against Coinbase, which is one of the largest cyrpto exchanges in the United States, in order to find information on potential tax evaders. This is not a good time to be making mistakes on cryptocurrency tax returns.

PROFESSIONALS ARE KNOWLEDGEABLE

Cryptocurrencies are in an unusual middle ground where the IRS is now cracking down on them, but even many licensed CPAs are struggling to understand the new tax law. So, to navigate, it’s important to not only find a professional in tax law, but one who is current on cryptocurrency tax law as well. Here at Camuso CPA, we have all the knowledge necessary to save you as much money as possible on your cryptocurrency tax returns. That puts us on the cutting edge of a brand new financial trend. When it comes to protecting your investments in the form of cryptocurrencies, Camuso CPA is one of the few CPA firms that can work with you to ensure you are compliant with tax law.

AVOID AUDITS/COURT

Even something as simple as human error on a tax return can result in an audit by the IRS. For investors out there, this poses a significant problem when trying to report income. By hiring out to a professional CPA firm, that firm can assume responsibility for the veracity of your tax returns. Considering how busy many investors are, the savings on time alone can be enough to justify cryptocurrency CPA services. An audit alone is stressful enough, but having to go to federal court to prove you earned your wealth legally is a real drain on both time and resources.

Hopefully we’ve explained the necessity for CPA tax help when it comes to cryptocurrency tax returns succinctly enough. Here at Camuso CPA, we are proud to help people in the Charlotte area save money on their tax returns. If you would like to know more about how our cryptocurrency tax services can benefit you, please do not hesitate to reach out to us at your earliest convenience. One of our friendly and knowledgeable representatives will be happy to answer any questions that you may have.

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CRYPTO BECOMES FASTEST GROWING FIDELITY CHARITABLE DONATION

Here at Camuso CPA, we offer CPA tax help for cryptocurrencies in Charlotte. Navigating the waters of the tax regulations for this new monetary medium can be tough. But, it is still well worth it to invest in this exciting new opportunity. In fact, there are so many people making money off of cryptocurrencies that Fidelity Charitable has reported that cryptocurrencies are their fastest growing charitable donation. We want to dive into the details of this phenomenon here a little further.

CRYPTO AND FIDELITY CHARITABLE

On February 14, Fidelity Charitable announced that it received $69 million from cryptocurrencies in the year 2017. This made it the fastest growing type of charitable donation given to the firm. Most of these donations were made with bitcoin and ether, and came from 169 separate donors. This is a full tenfold increase in cryptocurrency donations since the firm began accepting bitcoin back in 2015, putting cryptos at a 140 percent faster growth rate than other donation options like real estate and shares of LLCs.

Actually, cryptocurrencies have been using donations as a key crux to the case for their adoption since their inception. Back in 2013, BitGive began to help non profits become able to accept cryptocurrency donations, attracting a handful of big names to give the idea a trial. The very next year, Coinbase began its own service initiative to support non profits.

While Fidelity Charitable is seeing faster growth with cryptocurrency donations than other types of donations, it is an early adopter paving the way. It started accepting cryptos in 2015, but didn’t see much traction in the funding mechanism until 2017, after the firm began a huge marketing campaign to inform people cryptocurrency donation options. By November of 2017, Fidelity Charitable had gone from $11 million in donations to $22 million over a short time span, possibly coinciding with a tweet by bitcoin developer Gavin Anderson mentioning that he himself used the platform. Donations took off from there, and by the following month, the firm had seen an additional $36 million in donations.

TAX INCENTIVE

There are benefits that cryptocurrency investors can reap through tax incentives regarding charitable cryptocurrency donations. That is because Fidelity Charitable offers an “investor managed fund”, allowing cyrpto investors to donate assets including cryptocurrency without needing to pay capital gains taxes. Because of this, the firm typically sees an increase in donations the higher the tax bracket that a donor is in. And while cryptos still haven’t taken up the lion’s share of the market when it comes to traditional donation types, they are set up to make a major impact on charitable giving in the future.

Are you looking for a CPA in Charlotte for cryptocurrency tax help? Give Camuso CPA a call today. We also offer a host of other tax services for your benefit. For more information on how our services can help you, please do not hesitate to give us a call at your earliest convenience. One of our friendly and knowledgeable representatives will be happy to answer any questions that you may have.

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CRYPTOCURRENCIES AS PROPERTY & WHY PEOPLE HAVEN’T BEEN REPORTING

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Cryptocurrencies 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. Here, we will go over why many people haven’t yet reported their cryptocurrency transactions to the IRS, and why they should.

WHY HAVEN’T PEOPLE BEEN REPORTING THEIR CRYPTOCURRENCIES?

According to the personal financial service Credit Karma, only about 0.04 percent (or 100 citizens out of 250,000) of United States citizens reported their cryptocurrency transactions to the IRS as of February 13. The Tax General Manager of Credit Karma, Jagjit Chawla, did not express surprise at this low number, stating that people with more convoluted tax situations (like those performing cryptocurrency transactions) generally file later in the season. However, he added that the numbers did seem low considering how mainstream cryptocurrencies have become.

CRYPTOCURRENCIES AS PROPERTY

Back in March of 2014, the IRS began providing some guidance for the taxation of Bitcoin, one of the most popular and mainstream cryptocurrencies. Because of these guidelines, cryptocurrencies are treated as property rather than currency. Like all taxed property, when you report cryptocurrency to the IRS, what you owe will be based off of the price you bought it at, the price you sold it at, and the change in value between when you bought and sold it. Many experts believe this is not the ideal designation for cryptocurrencies, and may even become a deterrent in their adoption. Trader Brandon Williams, for instance, told CNBC that he thought it would be better to treat cryptocurrencies as currency.

In fact, Williams also argued that the small amount of cryptocurrency traders who have filed them in their taxes is due specifically because of the difficulties of treating cryptocurrencies as property rather than currency. For instance, he states that if a person makes more than two trades a day, they can expect to spend three to four hours every two weeks just tracking gains and losses while taking into account volumes and volatility.

With such a laundry list of tasks necessary just to file taxes properly, it’s no wonder most cryptocurrency traders haven’t filed yet. However, they must file if they don’t want to be audited by the IRS. Due to the novel and complicated nature of cryptocurrencies, the best and most efficient way to ensure you have your taxes done properly is to hire a professional CPA knowledgeable about cryptocurrencies.

If you are looking for qualified crytpocurrency tax services , Camuso CPA can help! Please feel free to give us a call for more information about our cryptocurrency and other tax services. One of our friendly and knowledgeable representatives will be happy to answer any questions that you may have. We look forward to hearing from you

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TAX IMPLICATIONS FOR CRYPTOCURRENCY INVESTORS

The first IRS tax guidance for cryptocurrencies was introduced March 2014, few CPAs have done comprehensive analyses of the record-keeping and enforcement challenges that will arise from the IRS designation of Bitcoin as property rather than currency.

The sale or exchange of a convertible virtual currency has tax implications, the nature of which depends on the investment and business activity.

If you hold cryptocurrencies as a capital asset, you must treat them as property for tax purposes. General tax principles applicable to property transactions apply. Long-term gains and losses will be taxed at the taxpayer’s applicable capital gains rate which are much more favorable than ordinary income rates.

If the coins are held as a capital asset any gain or loss from the sale or exchange of the asset is taxed as a capital gain or loss. Otherwise, the investor realizes ordinary gain or loss on an exchange.

This is favorable for miners and long-term investors, since they will capture a much more favorable marginal rate. Active traders who have short-term capital gains may still face ordinary income rates.

This categorization is also unfavorable to investors with trading losses since it will be much more difficult to write off losses due to their categorization as a property rather than currency. The IRS limits the amount of property losses that can be claimed on personal tax returns to $3,000 per year for both married and single filers. Short-term trading losses in excess of this amount will be carried forward for future years.

WHAT IS MY COST BASIS FOR MY CRYPTOCURRENCIES INVESTMENTS?

Reporting and enforcement regarding the taxation for cryptocurrencies presents many challenges for the IRS and taxpayers. The IRS requires that taxpayers report the fair-market value of their coins on the date that the currency is received. Taxpayers must determine fair-market value in a “reasonable manner which is consistently applied”.

Generally, the fair-market value reported by a taxpayer disposing of cryptocurrencies should serve as the additional cost basis for the new taxpayer acquiring the currency. This is a classic example of “easier said than done” since there is no way to ensure consistent reporting, and many taxpayers may report conflicting cost basis that maximize personal tax advantages. Often it may not be possible to accurately determine a fair cost basis especially for newly created currencies.

In early IRS rulings, the agency provided guidance separating traded “convertible” virtual currencies such as Bitcoin from other virtual currencies, noting that only convertible virtual currencies that have an “equivalent value in real currency, or that acts as a substitute for real currency” will be considered taxable.

There are generally two tests to determine a virtual currency’s convertibility. First taxpayer’s should determine whether a currency is “listed on an exchange and the exchange rate is established by market supply and demand,” which would make it convertible to another “real currency” like the U.S. dollar.

This presents a gray area for virtual currencies that are thinly traded on exchanges and only trade with respect to other convertible virtual currencies. Be aware the IRS has made it clear it plans to tax gains on successful convertible virtual currencies retroactively.

The second test is to determine whether taxpayers can buy anything tangible with the currency, or if its value is instead driven by speculation. The IRS outlined, “The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.” If a currency isn’t valuable in commerce there is a true question as to whether this will be treated by the IRS as convertible.

Traders are permitted to calculate their cost bases using different methodologies. Since currencies are considered private property from a tax perspective, investors have the option to sell their assets on a first-in-first-out (FIFO) basis, a last-in-first-out (LIFO) basis, or to sell those specific tax lots that are most efficient under the “specific share identification” method used for stocks. The choice of cost basis directly impacts long-term and short-term capital gains tax liabilities.

Trading platforms may automatically incorporate FIFO or LIFO tracking methods but neither of these options may present the most tax efficient method for a taxpayer. Generally specific share identification offers the greatest tax planning opportunities and benefits.

This is most likely the tax advantaged approach to tracking a taxpayers cost basis but it currently costly to do and often times not possible. Even the top exchanges and hosted wallets currently lack the accounting software needed to ensure trades are executed in on a share by share basis. Individuals must track their own sales which creates a high level of complexity and time commitment.

CRYPTOCURRENCIES AND WASH SALES

Since cryptocurrencies are generally classified as property, wash sale regulations should not currently be a concern for investors. This means investors can sell an investment to realize a tax loss, only to buy it back immediately thereafter at a bargain. Today, wash sales only apply to stocks and securities, so traders are operating in a gray area for now until further IRS clarification is issued.

Since cryptocurrencies have not been labeled a stock or security, the IRS can only tax traders for non-economic substance transactions under property rules. These transactions are similar to wash sales, considering the volatility of crypto markets and the potential argument that investors made late trades in response to market-moving news as opposed to tax motivations, traders have a legitimate position on the matter.

HOW CRYPTOCURRENCY MINERS CAN MINIMIZE TAX EXPOSURE AND PROTECT THEIR ASSETS

Cryptocurrency miners have two separate tax exposures. The first is the tax at the fair market value of the virtual currency on the day that it is mined into gross income. Generally, the net earnings from this activity will be exposed to self-employment tax.

The second is the capital gains which are due on the sale of bitcoins viewed as a capital asset. The basis price for the coins will be the fair market value on the date of acquisition. Capital gains will be due on the difference between that basis price and the eventual sale price.

When a miner sells their cryptocurrencies that they have mined, they will have to pay capital gains tax on any profit that they have made while owning them. The exception here is if bitcoins aren’t viewed as capital assets, but are instead viewed as inventory. This would be the case if a miner’s core business is selling cryptocurrencies. In that case, any gains on the bitcoins would be taxed as an ordinary gain or loss.

IRS Notice 2014–21 clarifies the treatment for bitcoin miners. Specifically, miners must recognize income for each bitcoin mined during the taxable year. The amount of income is equal to the market price of bitcoin on the day it is awarded on the blockchain. This also becomes the miner’s basis in the bitcoin going forward and will be used to calculate gain/loss in the future when the bitcoin is sold.

Mining expenses, such as electricity, would not be included into basis. Instead, they would be deductible in the taxable year as an expense. Miners will need to determine if their mining activity rises to the level of a trade or business, which is a highly factual determination. Maintaining proper documentation is essential.
Your choice of entity and tax treatment for your business is one of the first decisions that you will make regarding your company, and it should be with care. Like any business decision, the key to making the right choice is having the right information.

The first major step in choosing your tax treatment is selecting a business entity for your operations. You have four main choices:

• Sole proprietorship
• Partnership
• C corporation
• S corporation

To determine whether the S corporation is the right entity structure for your business, you have to know how it compares to your other options. The two main benefits of operating your business as an S-Corporation is relief from double taxation, and savings on employment taxes. If you are simply looking for liability protection, then single member LLC can be a less costly and complicated alternative.

If you own a C corporation, the government taxes both you and your corporation. First, the corporation pays income tax at corporate rates. Second, you as a shareholder pay tax on the dividend you receive from the corporation. S corporations pay taxes only once. An S corporation is a pass-through entity, which means that the S corporation does not pay taxes. Instead, the income, deductions, and tax credit items skip the layer of corporate tax and flow through to taxpayers via a K-1, onto their individual tax returns.

The main reason businesses or individuals choose an S-corporation tax structure is to realize tax savings on employment taxes. This is particularly valuable for miners. When you operate your business as an S corporation, you are both a corporate employee and a shareholder. As an employee, you receive a wage or salary to compensate you for the work you perform. As a shareholder, you receive distributions for your ownership stake in your S corporation. The salary paid to you as an employee is subject to employment tax. Your shareholder distributions are not. Since you set your own salary as the owner of the S-Corporation, you determine how much of the income generated by your business is subject to employment tax.

Tax planning and industry financial expertise is critical in this area. Setting your salary too low exposes you to risk of IRS examination which can result in payment of unpaid employment taxes and hefty penalties and interest. Setting your salary too high leads overpaying taxes. Over the course of your business’ life, the over-payments of tax and lost investment opportunities can cost you hundreds of thousands of dollars.

S corporations offer significant tax benefits to business owners and investors, but impose extra costs onto owners which must be considered when assessing the S-Corporation tax structure for your business. To obtain the tax benefits of an S-corporation structure, you will have to work closely with a CPA during the year on tax planning to ensure you are taking the correct measures to minimize your taxes. As previously mentioned, an annual in-depth analysis of reasonable compensation is required to substantiate your wage levels in the corporation. Additionally, S corporation tax returns are more time intensive and complex than a personal tax return and S corporations create extra tax-related paperwork each time you take money out of the corporation, so this is an additional administrative cost to consider.

TAX IMPLICATIONS FOR CRYPTOCURRENCY EARNINGS AND PAYMENTS

If you are an employer paying with a cryptocurrency, you must report employee earnings to the IRS on W-2 forms.

You must convert the cryptocurrency value to U.S. dollars as of the date each payment is made and keep careful records. Wages paid in virtual currency are subject to withholding to the same extent as dollar wages.

Employees must report their total W-2 wages in dollars, even if earned as cryptocurrency. Self-employed individuals with cryptocurrency gains or losses from sales transactions also must convert the virtual currency to dollars as of the day earned, and report the figures on their tax returns.

The best entity structure for individuals in this regard has been covered in previous articles regarding entity structure choices: https://www.camusocpa.com/tax/is-s-corporation-structure-right-for-your-business/#/

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