7 minute read
Cryptocurrencies have been gaining traction over the past decade, and in more recent years have begun to hit the mainstream. In most jurisdictions around the world, including the US, UK and Canada, cryptocurrency transactions are taxed to some degree. Here is what you need to know about tax planning for cryptocurrency as they grow in tax practice:
In the United States, cryptocurrencies are treated as property. This means that if the asset, such as Bitcoin, appreciates in value and your client sells or trades it, there will be capital gains tax. Likewise, if the cryptocurrency depreciates in value and your client sells or trades it at a loss, they may be able to deduct the losses against other capital gains to reduce their taxes.
For many cryptocurrency investors, this can get complicated fast due to the fact that the amount of tax can vary depending on multiple factors, such as how long the asset has been held, the cost basis, the sale value, and any fees associated with the transaction. Many cryptocurrency enthusiasts also make multiple trades, sometimes daily, and keeping track of each of those taxable events created can quickly become a job in and of itself.
Here are the main taxable events you should be aware of:
The IRS has plainly stated that like-kind exchanges are not allowed so every cryptocurrency-to-cryptocurrency exchange is a taxable event.
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Some events are not taxable:
Assuming FIFO, here is a sample of what cryptocurrency taxes could look like in a hypothetical scenario:
These are just some of the scenarios to watch out for when tax planning if you hold cryptocurrency.
Since the first guidance the IRS offered in 2014 under Notice 2014-21, they have created a variety of tax forms which may apply for crypto tax filing depending on your filing as an individual or for a business. Here are some key forms to pay attention to when preparing a return:
Form 8949—Sales and Other Dispositions of Capital Assets: this is a complete list of every cryptocurrency disposal your client has had (e.g. sell, trade, etc.)
Schedule D—Capital Gains and Losses: this is an aggregate sum of your client’s capital gains across all asset classes
Form 1040—Individual Income Tax Return: including your Schedule D information
Schedule 1—New in 2019: This is the first question about cryptocurrency plus any income (from forks, airdrops, mining, or payments) that goes on the “other income” line 21
As cryptocurrency continues to become more mainstream, the IRS will likely continue to update its guidance as this new blockchain technology evolves over the coming years. Bitcoin and other digital currencies are now available on popular apps like Robinhood. Even PayPal announced that its customers will be able to buy and sell cryptocurrency using their PayPal accounts.
Since cryptocurrency is in such high demand, it’s important to tax plan if you already own cryptocurrency or if you plan to acquire some in the future: there is already a large market for tax planning. Considering that cryptocurrency exchange Coinbase has already been in contact with the IRS and an estimated 11% of Americans already hold Bitcoin.
Corvee is at the leading edge of all things related to tax planning.
See how Corvee allows your firm to break free of the tax prep cycle and begin making the profits you deserve.
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