Distributed ledger technology, or Blockchain represents a major paradigm shift in how companies and individuals do business. This revolutionary technology, often called the next industrial revolution, is already having a major impact on industries across the globe.
With thousands of cryptocurrencies to choose from, taxpayers involved in this exciting new space have a host of tax issues to consider. Businesses accepting cryptocurrency, or individuals mining, trading or making purchases with crypto all have to comply with very specific IRS regulations.
At Rogatinsky Holcman, our seasoned professionals are passionate about insuring our client’s compliance with all of the crypto and standard tax laws while insuring that the maximum available deductions are employed.
WHAT THE IRS IS SAYING
Currently, the only IRS guidance directly related to Crypto is IRS Notice 2014-21. The summary below highlights the challenges facing traders in complying with the complex rules. Don’t get stuck with an IRS audit letter or deficiency notice. Let the CryptoTaxExperts do it right the first time.
- Cryptocurrency is treated as property for tax purposes. It is not treated as currency.
- A taxpayer who received cryptocurrency as payment for goods or services must include the fair market value, in U.S dollars, of the cryptocurrency as of the date of receipt in computing their gross income, such amount then becomes the basis of the cryptocurrency they received.
- A taxpayer needs to recognize taxable gain or loss upon an exchange of cryptocurrency for other property, depending on the fair market value of the cryptocurrency and the fair market value of the property received on the day of exchange. The character of the gain or loss depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. If it’s a capital asset, the taxpayer generally realizes capital gain or loss on the sale or exchange of their cryptocurrency. If it’s not a capital asset, the taxpayer generally realizes ordinary gain or loss. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.
- The fair market value of cryptocurrency resulted from mining by a taxpayer is includible in the taxpayer’s gross income on the day the taxpayer received the mined cryptocurrency. The net earnings from the taxpayer’s mining activities are subject to self-employment tax if the taxpayer’s mining activity constitutes as a trade or business, and the taxpayer is not acting as an employee nor running the mining business under a corporation.
- Cryptocurrency received as compensation for services performed is treated in the same way as currency received for services performed. For example, cryptocurrency received by an independent contractor constitutes self-employment income; cryptocurrency paid by an employer as remuneration for services constitutes wages for employment tax purposes; a payment made using cryptocurrency is subject to information reporting (Form 1099).