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Cryptocurrency Accounting

Cryptocurrency Taxes & Decentralized Finance, Tax Guide To Trading, Lending, Borrowing

The cryptocurrency industry, and as a result, cryptocurrency taxes are constantly evolving. Decentralized Finance (DeFi) is a rapidly growing area of cryptocurrency that provides access to financial services, including trading, borrowing, and lending, without middleman like traditional financial institutions. This has provided many financial options for traders and long-term holders.

As with any evolution of cryptocurrency transactions, it is important to understand the tax implications of Decentralized Finance activities. Cryptocurrency tax is generally a tough topic for many investors and even tax professionals. Since the IRS has not given specific guidance for DeFi, this article is based existing cryptocurrency tax guidance and our interpretation of current tax laws.

If you are not familiar with the taxation of cryptocurrency transaction, read our Cryptocurrency Tax Guide before reading this article on the tax implications of various DeFi transactions.

How To File Cryptocurrency Taxes for Your DeFi Transactions

Our team at Camuso CPA can import data from Decentralized Finance platforms to calculate your interest, lending income, capital gains and losses. All that is required to start this process to the have the ETH addresses that were used for your transactions.

Cryptocurrency Tax Advantage & Disadvantages for DeFi Transactions

There are many tax benefits to using DeFi that you will read throughout this article as we cover different facets of decentralized finance. Some of the most notable benefits include borrowing against your cryptocurrency as collateral to maintain tax holding periods, avoid triggering taxable events by borrowing, rebalancing portfolios without triggering taxable events and favorable tax treatment with some lending protocols treated as capital gains.

There can also be potential drawbacks to Defi including unexpected income generated from token distributions and taxable events triggered wihen minting tokens.

Cryptocurrency Lending: Providing Cryptocurrency In Return For Interest

If you lend cryptocurrency or contribute it to a lending platform you will be liable for income that you earn for lending the cryptocurrency. Lending your cryptocurrency does not trigger a taxable event as if you sold your cryptocurrency, but the income you generate will be taxable.

The income you earn usually will be taxed as ordinary income but can also be taxed as capital gains depending on the facts and circumstances of the platform you are using.

If you are using Liquidity Pool tokens, these are scenarios where you may be liable for capital gains rather than ordinary income. This is due to the nature of liquidity pools, when you add or remove liquidity the transaction is structured like a token swap rather than income.

When transactions as taxed as capital gains this can offer potential tax benefits. The benefits include, being able to offset capital gains with losses and holding for long-term periods to receive favorable tax rates.

It is important to consult with an experienced cryptocurrency CPA regarding each individual Defi Platform and their tax treatment.

Cryptocurrency Borrowing: Receiving Loans for Cryptocurrency as collateral

Cryptocurrency loans offer great tax advantages for investors that are seeking liquidity without realizing taxable events or liquating their holdings. If you borrow using your cryptocurrency as collateral, you don’t realize tax on the cryptocurrency used as collateral since this is not a sale of cryptocurrency.

As long as your cryptocurrency is not sold or exchanged for another cryptocurrency, you will not realize a taxable event.

A risk associated with borrowing cryptocurrency is that if the value the cryptocurrency used as collateral goes down too much, or if the value of assets borrowed increases too much then you’ll trigger a margin call / liquidation. This would be treated as if you sold your cryptocurrency for dollars and will trigger a taxable event.

Cryptocurrency Taxes for Governance and Incentive Tokens

Many DeFi platforms now utilize governance and incentive tokens which are earned as income. When these types of tokens are distributed they will be taxed as ordinary income at the current market value. This value will also establish your cost basis. If you sell this token after holding it you may also realize a capital gain or less depending on the price of the token at the time of sale.

Wrapping Up

Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transaction, particularly DeFi.  It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.

Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.

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United Kingdom Issues Cryptocurrency Tax Guidance

Here at Camuso CPA, we offer a wide array of tax services for cryptocurrency investors including tax preparation and tax planning. Financial service 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.

The United Kingdom’s tax agency has released an explanation of how it sees cryptocurrency assets and how individuals will be taxed on their holdings. The report focuses on how individuals possessing cryptocurrency might be taxed,but does not outline the tax structure for tokens held by businesses or for business purposes. Guidance on that will be published at a later date. Her Majesty’s Revenue and Customs (HMRC) is the government agency responsible for collecting taxes.

This does not impact US investors, but we watch all crypto tax regulation developments closely to gain insights to perspectives and circumstances that can impact future legislation here in the USA. Much like the US the UK tends to view crypto tax property for tax purposes.

The report notes a token’s treatment for tax purposes is dependent on the token’s use case, rather than its definition. Cryptocurrencies will not be taxed in the same way as gambling. The report goes into detail, explaining how and when their transactions may be classified as securities. To simplify the calculations required, taxpayers are permitted to pool different assets together.

Investors who purchase tokens specifically in the hopes that their value will increase will be required to pay capital gains tax when they sell, while individuals who receive tokens from their employers as a form of payment, from mining, transaction fees or airdrops will have to pay income tax and national insurance contributions.

Tax authorities across the world will continue to issue further guidance and focus more heavily on cryptocurrency tax compliance. We will continue to track these developments closely. Time will tell, but it will be interesting to see how things develop here in the states related to the designation of cryptocurrency as intangible property from the Private Letter Ruling in 2014.

Contact Our Team Today

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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End to Anonymous Cryptocurrency Trading by Shapeshift, A CPA’s Perspective

Cryptocurrency exchange Shapeshift is launching a new mandatory membership program that will now require users to provide personal information. Cryptocurrency exchanges are under more regulatory pressure than ever, with governments requiring that they conduct KYC and AML procedures to prevent fraud. As a centralized exchange, Shapeshift lacks the ability to operate without a license or some form of cooperation from local governments.

KYC and AML processes are the first step for both exchanges and users to begin moving towards compliance and disclosure to regulatory authorities. As exchanges such as Shapeshift move towards user registration compliance, we noted in a separate recent article that various countries across the globe have developed in international crypto tax force to target non-compliant cryptocurrency investors.

As the topic of institutional investors and Bitcoin ETFs continue to gain more relevance, we will undoubtedly start to see more centralized exchanges conform to the same demands that traditional financial institutions comply with in order to gain access to larger customers. Our prediction is that we will see further sweeping inquiries into user data from exchanges such as we saw last year with the John Doe request from Coinbase, additionally investors should expect to receive more 1099-K forms from exchanges in future years.

The change from being an ‘exchange without accounts’ to requiring personal information was made for 3 primary reasons:

1) The requests of many of our users to have account-related features: A record of transaction history, saved/whitelisted addresses, and email notifications, etc.

2) Increasing interest in the broad phenomenon of tokenization — the ability to “financialize” and bring liquidity to various aspects of business/customer relationships. Specifically, the ability to build tokenized loyalty programs, in which the engagement between a business and its customers can itself become an asset.

3) The practice of requiring customers to hand over personal private information is one we’ve struggled with since inception. To the extent that digital asset technology remains a legal grey area, we need to be prudent and thoughtful in our approach as we navigate the regulatory environment.

Contact Us Today

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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WHAT TO DO IF YOU STILL HAVE NOT REPORTED CRYPTOCURRENCY TAXES THIS YEAR

With an exponential gain in value and thousands of businesses now accepting it as a form of payment, Bitcoin has quickly become one of the trending topics throughout the country. While there are various types of cryptocurrency out there, Bitcoin is currently the most popular form of digital currency (also known as virtual or cryptocurrency) throughout the world and is able to be exchanged for U.S dollars, Euros, and other real currency. In addition, Bitcoin can be traded for other virtual currencies, such as Ripple or Ethereum currency.

Whether people use cryptocurrencies to pay for products and services or strictly for investment purposes, they may not be aware that they have a possible taxable impact. If you have not reported your cryptocurrency taxes this year, you are not alone. In this article, we are going to review cryptocurrency and taxes, as well as what to do it you still have not reported them.

Before diving into the details of digital currency and taxes, we wanted to ensure our readers that while this article provides helpful and detailed information, it does not constitute professional financial counsel and should not be used as a replacement for tax advice from professional CPA firms. As such, we recommend reaching out to local CPA firms for individualized service that is tailored to your unique tax situation.

Do You Have To Pay Cryptocurrency Taxes?

In the past, many cryptocurrency investors pocketed profits and avoided taxation by selling virtual currency and putting the money made back into other digital tokens. This method, and loophole so to speak, is known as a like-kind exchange. However, with the value of cryptocurrency taking off this past year, along with the profits of investors, the IRS is holding it down come tax season. In addition to closing this loophole that many crypto holders used, the IRS has stated that cryptocurrency is considered property and that selling digital currency should be reported as a capital gain or loss. But what does this mean? Well, this means that selling certain virtual currencies in exchange for another virtual coin, or even using cryptocurrency to buy goods and services, is considered taxable and therefore should be reported come tax season. It is mandated by law that you pay taxes on those earnings.

What Happens If You Do Not Report Cryptocurrency Capital Gains?

Some cryptocurrency investors, despite the IRS’s warnings, still choose to hide their profits by not reporting their capital gains from virtual currencies. This is no surprise, especially after a past survey revealed that over 35 percent of cryptocurrency owners claimed they do not plan on reporting any gains or losses on their tax return. What many investors in this percentage may not be aware of is that not reporting their capital gains and losses is a form of blatant tax fraud. Purposefully hiding profits and failing to report capital gains can enable the IRS to enforce numerous penalties, such as criminal prosecution, which is generally used in more extreme cases that involve larger profits and capital gains. Those that commit this tax fraud can potentially face up to five years in prison. What’s more, there is generally a fine up to $250,000. Similarly, crypto investors that purposely file a false tax return to hide capital gains may have to pay a $250,000 fine, as well as face up to three years in prison.

Of course, keeping track of all of the transactions made with virtual currency is not always easy. There are not any promises that distributed digital currency exchanges are going to send a Form 1099 that details your trades as well as your profits and losses. Not to mention, if virtual coins were used to pay for goods and services, that is a taxable transaction that you will have to handle entirely on your own. While crypto transactions can be complex, the IRS and government fully expect us to comply with the set tax guidelines for cryptocurrency. Failing to do so can lead to further complications and issues down the like.

What If You Didn’t Report Capital Gains From Cryptocurrency?

Failing to report your capital gains is something that happens more often than people think, whether it is accidental or purposely. However, reporting these gains is the law and should be done to avoid any trouble. If you failed to report any income or capital gains on your taxes, or if you are uncertain whether or not you compiled within the guidelines set by the IRS, there are certain steps you can take to reduce the risk of being fined, or worse, facing criminal penalties. The right thing to do in this situation is to file your tax return immediately and pay as much tax owed as possible to avoid any additional penalties. While it is dependant on which reporting requirements you are subject to, in addition to the nature of the noncompliance, if you did not report your capital gains it may be best to:

  • Create a corrected Form W-2 using Form W-2c if you paid people with cryptocurrency
  • File a corrected Form 1099-MISC if you paid independent contractors with digital currency.
  • File an FBAR, or a Report of Foreign Bank and Financial Accounts to disclose foreign digital currency wallets.
  • Enroll in the Offshore Voluntary Disclosure Program to help reduce any potential fines and penalties and avoid jail time.
  • Get help from a local tax consultant.

While taking these steps can potentially help reduce any fines and penalties, or even protect you from criminal prosecution, if you still have not reported your cryptocurrency income and capital gains, it is vital that you discuss your situation with an experienced tax CPA that specializes in Bitcoin and other digital currencies. If you have questions about reporting virtual currencies on your taxes, a certified CPA should be able to assist you.

What Happens If You Owe and Do Not File or Pay Your Taxes?

When your taxes are late or not paid, the IRS will assess a failure-to-pay penalty. This penalty goes into effect after the regular due date. Typically these penalties are a certain interest charge of the balance due for each month or part of a month you are late.

Once the IRS discovers that your taxes are late, they will begin to send you computer paragraph (CP) notices. These notices will show how much you owe and demand immediate payment. If no actions are taken, the notices will continue to pop up in your mailbox for two to six months. If you avoid the notices and still do not pay the owed taxes, the following can occur.

Tax Levy

When the IRS seizes your assets, it is known as a tax levy. A tax levy only happens when all forms of communication and arrangements are ignored. The final notice will be sent at least 30 days before further action is taken.

Wage Garnishment

A wage garnishment, also known as a wage levy, is when the IRS contacts your employment provider and demand a portion of your paycheck. This will occur during every pay period until the taxes are paid in full or a payment agreement with the IRS is reached.

Bank Levy

A bank levy is when the IRS contacts your bank. When this happens, your bank will instantly freeze your accounts so you are unable to take money out. If arrangements are not made, the bank will send money to the IRS about three weeks later. This of course is something that shouldn’t be taken lightly.

Asset Seizure

The IRS has the ability to seize various assets like vehicles, houses, boats, and other assets if the owed taxes are not paid and an agreement has not been reached. This is something you will want to avoid, as getting seized property back can often be a long and difficult process.

Passport Revocation or Suspension

Many people don’t know this, but the IRS can revoke or suspend the passports of delinquent taxpayers who owe more than $50,000 in taxes (including interest and other non-payment penalties). Not to mention, the State Department will likely not issue or renew your passport if you owe more than 50K.

Criminal Prosecution

If you continue to file a tax return year after year, or you avoid paying the taxes that you owe you could be faced with criminal charges. Criminal prosecution is typically tied to tax evasion or tax fraud and since the government prefers working with non-compliant taxpayers. Since proof of intent to defraud is hard to prove, the IRS looks will generally search for patterns of abuse before taking any case to a criminal investigation

Again, if you fail to pay your taxes, most of these penalties and negative consequences can be prevented by working with a tax professional or the IRS directly.

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If you searching for local CPA firms in Charlotte 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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PORTUGAL PROVIDES HIGHLY ANTICIPATED TAX CLARITY FOR THE EU

The Portuguese Tax Authority (PTA) is one of few countries that has taken specific steps to create a framework defined framework for cryptocurrency taxation, helping to provide a great amount of clarity on the murky subject.

This came a result of an unidentified company seeking guidance on whether or not its token was covered by value added tax (VAT) exemptions similar to what are offered for legal tender. The announcement, like most tax provisions, contain general provisions and exemptions as noted below:

Transactions that contain a token could, in principle, be considered as a critical transfer of goods and result in a VAT liability. However, the PTA acknowledged that the digital coins could be eligible for the legal tender VAT exemption.

The PTA explained that the exemption would only be applicable in instances where the transfer of the tokens occurs in an alternate form of payment. This means that, the tokens most likely would be exempt if they are exchanged using a defined legal currency.

Since the VAT system is used among all European Union (EU) member states, the decision by the PTA most likely will be mirrored throughout EU states. This is a large step forward for the global crypto-community who is looking to move the industry forward by aligning with new regulations for mainstream adoption.

Are you looking for a CPA in 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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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.

Contact Us Today

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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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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