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CPAs Net

Tax implications for cryptocurrency owners

  
June 22, 2021
Payne, Nickles & Company

 
Cryptocurrency, a type of virtual currency that utilizes cryptography to validate and secure transactions digitally recorded on a distributed ledger, such as a blockchain, has been on the rise over the past several years. Approximately 14 percent of Americans own at least one share of virtual currency. Therefore, it's essential to understand the tax implications associated with receiving, buying, and selling these currencies, mainly because the IRS is starting to crack down on reporting for capital gains and losses associated with them. 
 

Keep reading to learn more about the tax implications associated with cryptocurrency and what the IRS is doing to sharpen its focus on crypto transactions. 
 

What you need to know about virtual currency tax reporting:
Much like when you hold investment accounts, cryptocurrency owners must recognize gains and losses when filing their taxes. While gains are typically subject to capital gains taxes, losses can sometimes be used to offset those gains. 
  

Here are some important details:
 

-    Short-term gains/losses: Virtual currency held for one year or less recognizes gains or losses as short-term gains. 
-    Long-term gains/losses: Virtual currency held for more than one year recognizes any gains or losses recognized as long-term. 
-    Calculating: To figure out if you have a gain or loss to report, subtract the value of the cryptocurrency on the day you purchased it (the virtual basis or cost basis) from the value on the day you sold it. If it's positive, you have gains to report. If it's negative, you have a loss. 

 

What about using virtual currency as a form of payment?
Whether you're using virtual currency to pay someone or receiving virtual currency as payment for something, there can be tax implications. When reporting virtual currency received, use the fair market value on the day you received payment. Here are a few popular reasons virtual currency can be exchanged between two parties:


-    Payment for goods or services (Payee): If someone uses cryptocurrency to pay you or your business for goods or services, you will report this as income. If you're self-employed, this will also be subject to self-employment tax. 
-    Payment from an employer: If an employer pays you in cryptocurrency, it constitutes wages paid, and it will be included in your W-2 as income received. 
-    Payment for goods or services (Payer): If you or your business uses virtual currency to pay for goods or services, there will be a gain or loss to recognize for the funds used. 
-    For more information about the tax implications of using virtual currency, view the IRS FAQ located here

 
While it may seem tedious to track every single purchase, exchange, trade, or receipt of virtual currencies, there are online platforms available that analyze the transactions and report to you when you have gains or losses to recognize. 
 

What the IRS is doing with cryptocurrency reporting:
The IRS added a question to Form 1040 asking if the taxpayer has sold, exchanged, sent, received, or otherwise acquired any financial interest in virtual currency. With the IRS requiring taxpayers to treat virtual currency as property for Federal income tax purposes, it shows they recognize virtual currencies aren't going away any time soon.
 

For help reporting virtual currencies on your tax filings, reach out to our team of tax professionals today. Establishing a system to track purchases, sales, and transfers before the end of the year will help ease the burden of preparing for tax season.  

 
 

419-625-4942             419-668-2552
Sandusky                             Norwalk

 

 

 

Treasury Circular 230 Disclosure

Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.