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Taxation of Cryptocurrency Resources – The CPA Journal

Individual taxpayers have probably noticed that they have had to answer Form 1040 questions regarding virtual currency transactions in recent years. The US Congress has introduced, and in some cases passed, a variety of laws dealing with different aspects of cryptocurrency, although the federal government’s perspective on virtual commerce has not been timely or in tune with investors who actually acquire and use digital assets. The relatively modest amount of existing IRS guidance treats cryptocurrency as property and reflects an attitude of suspicion towards the intentions of taxpayers who participate in the virtual exchange economy. In this sense, the IRS Criminal Investigations (CI)_Cyber ​​Crimes Unit pursues investigations related to cryptocurrency abuse, such as defrauding investors and laundering stolen cryptocurrency, among its targeted objectives. There is no doubt that such manipulations occur, as evidenced by IRS CI’s seizure of virtual currency valued at over $3.5 billion in 2021 and already exceeding that of 2022 (FS-2022-19, march 2022, https://bit.ly/39EerYl).

The tax issues surrounding virtual currency are something that many tax professionals will find both interesting and necessary to serve clients who participate in the crypto-economy. This month’s column features several resources that can provide information.

Internal Revenue Service

The IRS virtual currencies The webpage (under “small business and self-employed”) provides access to some of the federal tax guidelines on reporting taxable virtual currency transactions (https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies). The page contains links to Notice 2014-21, Tax Ruling 2019-24, and several IRS publications that may be relevant to cryptocurrency transactions, such as Publication 525, “Taxable and Non-Taxable Income “. The Frequently Asked Questions feature should not be overlooked; it is perhaps the most useful tool on this web page.

Tax Notice 2014-21 (https://www.irs.gov/pub/irs-drop/n-14-21.pdf) generally discusses the IRS’ view of using virtual currency to pay for goods or services or to be held as an investment. The majority of the notice consists of FAQs that describe relevant tax law definitions and applications. For example, Q-1 indicates that virtual currency is treated as property for tax purposes. Q-2 indicates that virtual currency is not treated the same as foreign currency.

Tax Ruling 2019-24 (https://www.irs.gov/pub/irs-drop/rr-19-24.pdf) applies IRC Sections 61, 1011, and 451 to cryptocurrency transactions. The FAQ (below) explains the terms “hard fork” and “airdrop”; Briefly, a hard fork is a permanent split in the blockchain that creates a new branch of currency. An airdrop occurs when new tokens are deposited into users’ wallets, which can result from hard forks, but can also come from other events. To further compound the complexity, a beneficiary may or may not have dominance or control, which also affects whether gross income was actually or implicitly received.

The Frequently Asked Questions on the IRS Virtual Currencies webpage is a useful feature that expands on the FAQ started in Notice 2014-21 and covers many practical issues, starting with what is virtual currency, how is cryptocurrency treated for tax purposes and what is cryptocurrency, as well as questions about specific transactions (https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions). The FAQ defines virtual currency as a digital representation of value that functions as a unit of account, a store of value, and a medium of exchange. Cryptocurrency is a type of virtual currency that is recorded digitally on a distributing ledger. In accordance with Notice 2014-21, virtual currency is treated as property and generally falls under the tax rules applicable to real estate transactions.

In addition to the resources linked on the IRS Virtual Currency webpage, there are two other items that readers may find helpful. First, the most recent Guide to tax time press release (IR-2022-45, March 1, 2022, https://bit.ly/3b2gZQp) provides a convenient list of taxable virtual currency transactions, such as receipt of virtual currency as payment for goods or services provided, receipt of new virtual currency as a result of mining and staking activities, and any assignment financial investment in virtual transactions. currency. A second resource addresses more complex issues. Memorandum from the Office of Legal Counsel 202114020 (April 9, 2021) clarified Tax Ruling 2019-24’s position regarding whether a taxpayer who received Bitcoin cash following a highly publicized August 2017 Bitcoin hard fork had a gross taxable income under Section 61 of the IRC; the decision surprised many taxpayers (https://bit.ly/3NXY9bM).

AICPA Virtual Currency Tax Guidelines

The AICPA Virtual Currency Tax Tips and Resources Web page (https://www.aicpa.org/resources/article/virtual-currency-tax-guidance-and-resources) provides access to a selection of AICPA and IRS documents. “Navigating the World of Crypto Tax Reporting” (https://bit.ly/3tHoEua) is a 12-page PDF prepared in partnership between CPA.com and Lukka, Inc. AICPA members can access it for free after logging in, and the general public gets one-time access with registration. The booklet features a handy glossary of crypto terminology, an overview of IRS guidelines, a discussion of tax reporting challenges, and an explanation of how CPAs can play a role, especially for reporting entities.

The AICPA offers two 20-minute podcasts, including “Dissecting the Latest in the World of Crypto Assets and Taxes” (October 6, 2021, https://bit.ly/3tI8eBu). This presentation covers cryptocurrency basics and some of the terminology, cryptocurrency taxation and IRS guidance, and recommendations for addressing IRS notices to clients regarding virtual activities . The podcast webpage includes links to several related resources. “Cryptocurrency: Discover three ways to add value to your customers” (May 2022, https://bit.ly/3QmvUoK) outlines ideas for CPAs to help clients who want to invest in virtual currency, as well as tax planning and reporting considerations.

Other Resources on Cryptocurrency Taxation

With little official guidance on the expected increase in third-party reporting requirements targeting tax evasion in the virtual economy, as well as learning technical crypto terminology, readers may be interested in some of the material. useful from commercial suppliers.

Basics and Beyond, Inc., is a commercial provider of tax-related continuing professional education for CPAs. The company provides a monthly newsletter on its Tax News and Events blog (https://www.cpehours.com/blog/) which covers a variety of tax topics and sometimes offers additional tools and resources. “The Tax Considerations of Cryptocurrency: An Accountant’s Primer” (January 2022), covers much of the basic terminology and also lists some software options (https://bit.ly/3NY08wK). The thing to see, however, is the example “Client Letter: 2023 IRS Cryptocurrency Reporting Requirements” in the April 2022 bulletin (https://www.cpehours.com/tax-newsletter-april-2022/).

Cryptocurrency software providers can be a good source of basic tax information, and a small selection is shown below.

SocialFinance, Inc. “Crypto Tax Guide 2022: How to Report Crypto on Your Taxes” is available as a webpage and covers the topic from the perspective of tax effects on transactions (https://www.sofi.com/learn/content/crypto-tax-guide/). Readable Platform from Verady, Inc. “Best Practices for Crypto Tax Reporting – A Guide for Tax Professionals” (February 2022) can be viewed on its website (https://bit.ly/3u5FFyn) on or downloaded in PDF format. coin tracker The website offers a “Cryptocurrency and Bitcoin Tax Guide (2022 Edition)” web page (https://www.cointracker.io/blog/crypto-tax-guide) with many hyperlinks.

To finish, Global Legal Insights is a publisher of books dealing with specific areas of legal practice. It currently offers a free online-only view of a book chapter, “Blockchain & Cryptocurrency Law and Regulation 2022: 14 US Federal Income Tax Implications of Issuing, Investing and Trading in Cryptocurrencies” which features an understandable discussion of tax law, including footnotes identifying the specific primary source law (https://bit.ly/3NW2WdP).

Susan B. Anders, Ph.D., CPA/CGMA is the Louis J. and Ramona Rodriguez Professor Emeritus of Accounting at Midwestern State University, Wichita Falls, Texas. She is a member of the Editorial Advisory Board of the CPA Journal.