Everyone hates that one guy that doesn’t conform to our definitions of what we should and should not give to the government:the taxman.
Most of the members of the crypto community made their peace long ago that the industry would “somehow” never be taxed.
These days, that is far from the truth!
Crypto taxes are popping up everywhere!
Our experts ave us some insights (in some jurisdictions).
Here’s what they had to say.
Dmitri Alexeev, Tax Partner at Aprio and Emily Cheshire, Practice Leader for Blockchain at Aprio
“Companies in the digital asset/blockchain industry are seeking regulatory, accounting and tax solutions to be compliant while facing increasing challenges posed by tax and regulatory uncertainties in the United States and world-wide. The ecosystem stakeholders are looking for best practices that can effectively help navigate regulatory and compliance uncertainties and risks.
While a universal solution might not fit every distinct case, the following is a set of best practices tailored to address a spectrum of pertinent issues. These practices chiefly focus on addressing prevalent challenges encountered by U.S. businesses in the digital asset/blockchain space with certain elements being applicable to certain individual investors.
- Initiate timely tax and business consultations – avoid delay. To steer clear of problems, enlist assistance from experienced professionals who have a proven industry experience. If you are a business owner, you will likely need help from experienced attorneys, accountants, tax advisors, auditors/technical accounting experts, valuation, internal control, information security and risk management specialists as well as other advisors to guide you. Ensure your consultants are proven professionals with genuine crypto expertise; and, most importantly, build a knowledgeable team to evade costly errors.
- Get your accounting right using the right tools. Ensuring accurate reconciliation necessitates quantification and valuation of digital asset activities, especially crucial for businesses engaged in mining, staking, decentralized finance, NFTs, or complex lending and derivatives transactions. Central to the comprehensive solution is the strategic integration of a suitable digital asset software solution with the existing ERP system. Regular timely monthly and quarterly reconciliation is an essential for an overall success. This procedure involves analysis of digital assets (i) quantity (units) and types, (ii) cost and fair value basis; as well as (iii) intercompany and related party transactions. Accounting for digital assets has direct tax implications. Consequently, employing suitable tools and establishing internal controls is vital for maintaining financial records and guaranteeing accurate financial and tax reporting.
- Define your digital asset accounting policies – Working with advisors to define your digital asset policies from day one will help avoid confusion and potential tax liabilities later down the road. Examples of policy decisions include what accounting method you will use (for example first in, first out, specific identification etc.), whether to treat wrapped tokens in the same manner as the underlying token, and defining whether you will treat staked tokens as a disposal. Working with advisors to provide guidance on the policies initially will ensure clarity and ensure that you are adhering to the latest regulations and industry best practices.
- Digital Asset Custody and Control. Incorporating digital assets onto your balance sheet, encompassing customer assets, necessitates and digital asset wallet hygiene; and, if applicable, ensuring a trustworthy custodial arrangement. Equally vital is the establishment of robust internal controls to prevent any co-mingling of customer assets with those of the company. Addressing both treasury and financial requirements is imperative, alongside prioritizing cybersecurity, privacy, and risk management measures. Instances of asset theft and non-compliance with regulations can result in unforeseen business, regulatory, and tax consequences.
- Design Compensation and Incentives. During the initial stages of a startup, compensation becomes a pivotal consideration for founders and essential personnel as company’s often don’t have cash to compensate their key employees and founders.
Fundraising challenges often lead new digital asset and blockchain enterprises to utilize tokens instead of stock options or other equity compensation as a means of rewarding founders, workers and external vendors. Tokens are particularly attractive at this phase since they generally circumvent equity dilution.
When digital asset compensation is structured correctly in mind with regulatory compliance, external stakeholders are aligned with the project’s objectives together with the compensation requisites of stakeholders, workers, vendors and sophisticated investors. Digital asset ad blockchain companies are increasingly embracing token-based award plans as well as digital asset compensation. With the right vendor support and internal solutions, the compensation can be seamlessly automated through smart contracts, potentially reducing administrative expenses and directly motivating employees to contribute to the company’s product portfolio.
The topic of tokenization and crypto-based compensation has generated considerable debate, highlighting the essential requirement for expert legal guidance from securities, labor law and tax specialists.
Consider AML/KYC and Form 8300 and 1099 compliance. AML/KYC compliance holds utmost significance in the context of digital assets. As the use of digital assets and complexity of transactions surges, robust Anti-Money Laundering (AML) and Know Your Customer (KYC) measures become indispensable. These safeguards not only enhance security and transparency but also align with regulatory requirements, mitigating potential risks and fostering trust within the digital asset ecosystem. Digital asset brokers should (i) implement the necessary internal controls, (ii) update their policies, (iii) review and update their AML/KYC compliance; and (iv) prepare to provide full tax reporting to individuals and the IRS for the 2023 tax year.”
Jagruti Solanki, CFO at BitPay
Ways in which crypto taxes are evolving as digital assets become the norm
- One aspect of crypto taxes that is evolving is the number of ways that taxable events can occur. By law, a taxable event is triggered anytime you’ve profited from a crypto transaction – this doesn’t just mean buying low and selling high. Generally speaking, other than sale of crypto, transactions where users are offloading their crypto in some form or earning crypto as a reward, can also trigger taxable events. BitPay and other fintech organizations are giving consumers more options to use and spend cryptocurrency than ever before. Whether that’s paying a merchant directly, loading a crypto debit card with crypto, buying gift cards with crypto, or any other transaction like earning crypto from staking – these can all be considered taxable events by the IRS.This is one of the reasons we see crypto tax services and platforms like ZenLedger becoming popular. BitPay and ZenLedger partner together so that crypto consumers can cohesively see their transactions across wallets all in one place, making it easier to aggregate crypto transactions such that a user can track cost basis and calculate realized gain / loss which further helps with determining taxable gain / losses.
- What users should know about crypto taxes as adoption increases
- Along with a strong understanding of taxable events, they should know the best ways to minimize their crypto tax liability.
Even before filing your taxes, take advantage of tax-loss harvesting. This strategy allows users to optimize their tax situation by utilizing investment losses and deferring and / or lowering your tax liability.
Hold onto assets for over one year allows a user to benefit from reduced long-term capital gain tax rates.
Depending on the type of crypto transactions (buying, selling, trading, mining, staking, etc.), a user may have distinct tax implications. Rewards earned from participating in decentralized finance (DeFi) activities such as staking or receiving tokens as rewards can lead to taxable events. If the user participates in cross-border transactions, the user may need to understand the complexities with tax implications, including potential double taxation. Activities such as airdrops and forks can result in taxable events, and understanding how to derive the taxable value of the asset and timing of constructive receipt is critical.
And finally, some of the biggest mistakes are due to human error when it comes down to actually filing your taxes. Using crypto tax software like ZenLedger streamlines the process by consolidating taxable events from multiple wallets and automatically computes the fair market value, gains/losses, applies the cost basis to the segment of crypto sold, and performs tax-loss harvesting from your transaction history with just a few taps. Additionally, it can determine the cost basis using methods like FIFO, LIFO, and specific identification, among others, depending on which approach the applicable tax authority allows.
- What potential legislation could look like, as companies propose exemption for crypto transactions (as reported by Cryptopolitan)
In response to the U.S. Senate Financial Services Committee’s request for input on crypto tax guidance, Coin Center, a cryptocurrency advocacy group, has proposed changes to potential crypto tax legislation to U.S. lawmakers. Some of the key recommendations include:
De Minimis exemption: Establishment of a de minimis exemption for cryptocurrency transactions by the IRS,
Crypto assets as currency and means of payment: Treating crypto assets similar to foreign currency purchases and as a method of payment, versus property
Privacy and reporting enhancements: There are discussions about addressing privacy concerns and reporting requirements in cryptocurrency transactions.
Narrowing down the broker definitions: In addition, the current definition of a broker as defined in the Infrastructure Bill is too broad and proposes narrowing the IRS’s definition to exclude entities like crypto miners and lightning node operators.
Waiving crypto donation appraisal requirement: Coin Center also emphasized the need to waive the requirement for a qualified appraisal process for certain crypto donations.
Varsha Subramanian, CPA, at FlyFin.tax
Tax Compliance and record-keeping
Navigating the crypto taxation landscape is complicated. Therefore, it’s crucial to be aware of compliance best practices. At the top of the list is diligent record-keeping. Cryptocurrencies are considered property by the IRS, and one of the easiest ways to keep yourself covered tax-wise is by maintaining accurate records of all transactions, including purchases, sales, exchanges, and even transfers between wallets. Here’s where FlyFin can help. Using the app to document your transactions systematically helps establish a clear audit trail. It lets you calculate your gains or losses with maximum accuracy to report them on Schedule D of your 1040 Form.
Tax-Savings with Cryptocurrency Transactions
Knowing which transactions are classified by the IRS as capital gains, income, or other taxable events can significantly impact the taxes you pay – or don’t pay. The most common crypto tax events are exchanging one cryptocurrency for another or selling cryptocurrency for fiat currency. Each of these transactions can trigger a tax obligation.
To minimize your tax liability, consider the concept of tax-loss harvesting. This is when you strategically sell losing investments to offset your capital gains, reducing your overall tax liability. In some cases, you can take advantage of tax exemptions or lower rates for long-term capital gains, which are in place to incentivize investors to hold onto their cryptocurrencies for time.
Advice From a Professional Crucial
Proactive tax planning can help even the most seasoned crypto trader navigate the intricate tax codes relating to cryptocurrency. Guidance from professionals who are well-versed in tax regulations and the blockchain ecosystem can make a huge difference in your taxes. CPAs at FlyFin are experienced in helping crypto traders maximize their tax savings, accurately calculating your gains, losses and liabilities while finding every potential deduction or credit for which you might be eligible.
International tax implications, for example, if you engage in cross-border transactions or hold accounts in multiple jurisdictions, should be a particular area of concern. The potential for double taxation or complex reporting requirements can profoundly affect your crypto finances.
Thomas Kneeland, TaxBuzz Contributor and President of Kneeland CPA
“1. It is imperative to understand the tax implications of cryptocurrency. Cryptocurrency is treated as property by the IRS, so any gains or losses you realize from trading or using it are taxable. The length of time you hold an asset determines whether your gains are taxed as short-term or long-term. Short-term gains are taxed at your ordinary income tax rate, while long-term gains are taxed at a lower rate.
If you receive cryptocurrency as an airdrop or fork, you will need to report it as income.
Be aware of the tax implications of staking and lending. If you stake or lend your cryptocurrency, you may be taxed on the rewards you earn.
2. Keep good records of your transactions. This includes the date, amount, and type of each transaction, as well as the cost basis of the asset. You can use a crypto tax software to help you track your transactions and calculate your gains and losses.
3. Report your crypto gains and losses on your taxes. You will need to report your crypto gains and losses on your Form 1040. If you have a loss, you may be able to deduct it from your taxable income.
4. Be aware of the wash-sale rule. The wash-sale rule prevents you from claiming a loss on a security if you repurchase the same or substantially identical security within 30 days of selling it. This rule also applies to cryptocurrency.
5. Consider working with a tax professional. If you have complex crypto transactions or are unsure about the tax implications, you may want to consider working with a tax professional.”
David W. Klasing Esq. CPA M.S. Attorney at David W. Klasing
“In general keeping records of all cryptocurrency movements is crucial. Since cryptocurrency is seen as property in the IRS’s eyes, tracking your cryptocurrency’s value is crucial, along with any trades, sales, and gifted cryptocurrency received is necessary. You should also maintain the records for Cryptocurrency from the date received until the period of limitations expires for the year in which you disposed of the property.
1. All Cryptocurrency holders must record and account for capital gains. It is imperative to keep up-to-date and accurate records of all cryptocurrency transactions made, from purchased cryptocurrencies to any received or traded. If you are a business that accepts cryptocurrency, you are very likely to incur an obligation to pay capital gains taxes due to the fact that in 2014 the IRS held that bitcoin and other virtual currency must be treated as property rather than currency. Capital gain is accounted for by recording a starting value when the property is obtained and a closing value when the property is sold or transferred. The difference in value is the gain. Generally, the gain is realized and comes due in the tax year where the property, in this case, Bitcoin, is sold or transferred.
2. When cryptocurrency is used to pay employees payroll tax records must be kept. Paying employees in digital currency does not change the expectation of a business owner to account for, collect, hold, and pay payroll taxes. With typical payroll IRS expectations, currently IRS instructs business owners to maintain their employment tax records for a minimum of 4 years, however, when records are connected to property, such as cryptocurrency, the IRS states that records should be kept until the period of limitations expires for the year in which you dispose of the property.
3. When receiving cryptocurrency as income for services performed and are not an employee you are likely looking to be able to account for capital gains, income tax, and self-employment taxes. The self-employment obligation can be reported via Schedule SE or IRS Form 1040. You may also utilize the 1099 provided by your employer to determine the correct numbers to report. Once again, since the reporting is connected to property, it is prudent to keep records for the latter four years or until the period of limitations expires for the year in which you dispose of the property.
Key takeaway – Remember that cryptocurrency is considered property in IRS terms and capital gains taxes should be expected. Record a starting value and continue to record and maintain all movement regarding any currently owned cryptocurrency from the date of receiving the property and maintain these records until the period of limitations has expired for the year in which you dispose of the property.”
Dave Birnbaum, Vice President, Director of Product at Coinbits
“Bitcoin is still gaining acceptance as money, so it is best used today as a buy-and-hold store of value. For that reason, I only purchase bitcoin in amounts that I’m relatively confident I will not need to sell, barring a life emergency. As long as you don’t sell bitcoin, you do not incur a taxable event. Buy it, hold it, let it appreciate in value while the regulatory issues work themselves out over the coming years. Bitcoin is hard money, not a casino chip – and its volatility makes it very difficult to trade profitably.
New market offerings are giving people a way to access the purchasing power of their bitcoin without selling it. One such product which our team is developing will let you receive a cash advance by locking up your bitcoin for a period of time. This is a great alternative to selling bitcoin because, if you pay back the advance in time, you avoid taxes on the sale of bitcoin because it was never sold. Meanwhile, if you don’t pay it back, your bitcoin is sold and you have not gone into debt just because you needed some quick cash.”