Tax Considerations for Crypto Investors



Cryptocurrencies, or as the IRS calls them, “virtual currencies,” are taking the world by storm. More and more investors are eagerly looking to take advantage of the volatility in the crypto market and earn a return on their investment. That said, investors should be wary of federal agencies’ approaches to crypto investments as well as whether their activities trigger crypto tax reporting obligations.

5 tax tips for cryptocurrency investors

  1. Investors should be familiar with the history of IRS guidelines and publications on virtual currencies.

IRS guidance on “virtual currencies” dates back to 2014. In 2014, the IRS issued its Notice 2014-21, which clearly states that virtual currency transactions will be treated as property for tax purposes. federal income tax. When defining the purpose of virtual currency, this notice describes virtual currency as a digital representation of value that may have one or more of the following purposes: (1) medium of exchange; (2) unit of account; and (3) store of value.

When the IRS began to realize that the country was facing a significant under-reporting problem regarding virtual currencies, it issued a reminder bulletin to US taxpayers in 2018. This bulletin urged taxpayers to report their transactions in virtual currency under penalty of criminal prosecution. In 2019, the IRS issued the release, IR-2019-132, in which it noted how the agency had sent more than 10,000 letters to taxpayers for failing to report all of their virtual currency transactions or for reporting these information inaccurately. Finally, starting with the 2019 tax year, the IRS added a very specific question to Form 1040: “At any time during [the taxable year]have you received, sold, sent, exchanged or otherwise acquired a financial interest in virtual currency? »

  1. Various cryptocurrency transactions trigger tax reporting requirements, sometimes both at the time of receipt and at the time of sale or disposition.

Before investing large amounts in cryptocurrency and then trading, selling or disposing of them with the expectation of making a profit, investors should understand that such actions carry tax liability and liability obligations. declaration. Depending on the type of cryptocurrency or “virtual currency” transaction, this could mean the creation of a taxable event that produces either ordinary income or capital income. In addition to the obvious reporting obligations incurred for selling or exchanging virtual currencies, other activities such as selling or receiving airdrops, revenue from initial coin offerings (“ICOs”), or mining coins also create tax reporting obligations.

On that note, cryptocurrency mining is a special topic. Crypto mining triggers two taxable events. The first tax event occurs when the taxpayer mines the cryptocurrency, thus receiving a new coin as a reward for being the first to successfully verify the transaction. This is reported as ordinary income. The second tax event occurs when the taxpayer decides to sell, exchange or later dispose of this cryptocurrency. This is reported as capital gains or losses and can be short or long term, depending on how long the taxpayer has held the cryptocurrency. Finally, individuals who engage in mining as a business may qualify for the usual business deductions under Section 162 of the IRC.

  1. The crypto investor tax filing process for crypto investors is both nuanced and dependent on several factors such as type of business, hobby income vs. business income, and business status. deposit.

Reporting virtual currency transactions involves several forms and several steps. The first question to ask is whether they actually engaged in a virtual currency transaction. If you have, the next question is whether these transactions are ordinary or capital in nature. Answering this question involves looking at the purpose of the transaction, the nature of the transaction and the holding period. For example, income from ICOs is ordinary, while the sale of cryptocurrencies held for more than a year is capital. After the taxpayer determines the holding period, the transactions are netted and the taxpayer completes IRS Form 8949—Sales and other Dispositions of Capital Assets. The amount of the taxpayer’s capital gains and losses, including those from cryptocurrency sources, is also transferred to Form D. If the taxpayer has virtual currency transactions that generated ordinary income, this is also transferred. declared, but the form used may differ. (Schedule 1 for hobby income; Schedule B for interest earned; and Schedule C for businesses). Without proper guidance from a tax attorney or CPA experienced in virtual currency reporting, this process can be very tedious.

  1. The IRS can take criminal action against individuals and investors for failing to report or falsely reporting “virtual currency” transactions.

The IRS has recently increased its efforts to investigate and refer criminally prosecuted individuals who engage in criminal tax evasion involving cryptocurrencies. The IRS believes that greater resources need to be devoted to preventing tax evasion and crime, especially with respect to cryptocurrency markets that are already characterized by lax or non-existent regulation. Crimes such as money laundering, terrorist financing, wire fraud, cyberattacks and ransomware are increasing due to pseudonymous crypto transactions and lenient AML/KYC laws. In addition to preventing these crimes, the IRS is keen to investigate those who falsely report their virtual currency income or those who intentionally omit to report their income from virtual currency transactions.

  1. Finding law firms, attorneys, and tax professionals experienced in legal matters, tax filings, and cryptocurrencies can be a very difficult task.

Few law firms are experienced in dealing with cryptocurrencies and crypto trading, let alone their tax reporting obligations. For this reason, crypto investors should do their own research and ask questions before engaging the services of a law firm or CPA to handle their cryptocurrency issues. In addition to filing your taxes, a tax attorney, tax specialist, or CPA can help you in other ways, such as giving you insight into the IRS’ current treatment of cryptocurrency transactions. Other issues a tax attorney can help you with include developing a comprehensive compliance program or drafting detailed AML/KYC policies for your business. Plus, an attorney experienced in cryptocurrency issues isn’t limited to helping you with tax and IRS matters. They may also be able to advise you on legal matters under federal securities laws, investment adviser regulations, FinCEN rules and the Bank Secrecy Act.

“Many investors are eager to invest in cryptocurrency opportunities. At the same time, the investor suffers a significant loss if he does not undertake proper due diligence or fully understand the market nature of cryptography, tax reporting obligations, or federal agency positions on cryptocurrencies Hiring a law firm with experience in cryptocurrencies can reduce your exposure to liability and boost your compliance efforts. – Dr. Nick Oberheiden, founding lawyer of Oberheiden PC


Cryptocurrency investors should consider the above factors to fully understand the inherent nature of cryptocurrency investments and to enable investors to make informed decisions to protect their investments. By properly studying the history of IRS guidelines, triggers for tax reporting obligations, the tax reporting process itself, IRS and criminal procedures, and advice on finding a law firm, the Crypto investors will be better prepared to manage their cryptocurrency investments.

Oberheiden PC © 2022 National Law Review, Volume XII, Number 59


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