If you have already filed your 2020 individual tax returns, you probably noticed a question about Cryptocurrency. You may have already taken the deep dive into this topic and if so, I hope you still learn something from this. If you have more questions after reading, please contact Probity Tax Recovery at www.probitytaxrecovery.com
Do I have to pay taxes when I trade crypto?
Yes, provided you don’t lose money – and if you are still losing money in crypto, just stop here and spend some more time with the CryptoEQ team; then come back and read this later.
Quick note: There isn’t a set tax rate for crypto gains. Gains are added to your gross income and taxed at whatever your tax rate, based on how you are “using” the crypto (i.e. is it a capital asset for your business or not?).
When do I have to pay taxes on my crypto?
Short answer: tax time, or April 15th of the following year, provided you don’t have to keep up with estimated tax payments. Long answer: any time you recognize a gain, you will end up owing tax. All of this will be aggregated, and you will report it at year-end and pay it when your return is due. However, you may be required to pay quarterly estimated taxes. In this case, you have some options on how you are determining your estimated gains for the year. Talk to your accountant/tax professional or use a 1040-ES (individual) or 1120-W (business) and log on to www.EFTPS.gov if you are more comfortable handling it on your own.
Is cryptocurrency recognized as a foreign currency/foreign investment?
No. Regardless of where the crypto was “invented” or where the ICO occurred, Treasury doesn’t currently recognize “virtual currency” as anything that could create foreign currency gain or loss for Federal tax purposes.
Does the IRS recognize crypto as an investment asset or an exchangeable currency?
Short answer: yes, but more of the former and less of the latter. Long answer: most of the guidance set forth by the IRS show that most cryptocurrency adopters are using this technology in its nascent stages as an investment tool and not a means of exchange of value for goods and services. However, the IRS has not ruled out that frontrunners like bitcoin have the ability to be used in place of fiat and have provided some examples of how to treat these transactions (read: how to tax these transactions). As such, we will wait and see what happens as adoption ramps up over time.
So, what if I buy crypto and then go somewhere and use that crypto to buy coffee?
You owe tax on the difference between the market value of the crypto based on when you spent it (“cashed out”) and when you bought it. Plus, you probably paid sales tax on the coffee (there are only 15 U.S. states that don’t charge sales tax on food and beverage).
What if I sell something or do work and get paid in crypto?
You owe taxes on what you get paid based on the market value of the crypto when it was issued to you. Don’t assume that just because tax time is in a bear market that you are going to save money. Also, the assumption by IRS is that if there is an agreed upon price for the work up front, that is the fair market value of the payment. Ergo – if you agreed to get paid X amount of bitcoin, you will have to go to the ledger/transaction history for the market value. If you negotiated your contract in dollars, then that is what you say your Satoshis were worth upon receipt. Also, see the note in the next question about self-employment taxes – it could be applicable here as well.
Whatever you do, keep it consistent, maintain good records/documentation, and – above all – if you aren’t sure about something, speak with a professional.
What if I mine crypto – do I have to pay taxes when I successfully mine a coin?
Yes. Doesn’t matter what you plan to do with it. You pay the tax based on the market value when you mined it. If you hodl it and it appreciates in value, you pay additional tax on the gains when you dispose of it (trade or sell). What’s more, if you make money mining crypto and you own your own business – depending on your structure – you may owe self-employment tax on that income. Ouch!
What if I pay my employees in crypto?
This is tricky. The IRS essentially said this was fine in Notice 2014-211 provided that your business pays FICA, FUTA, and withholding taxes to the federal government based on the market value of the crypto you give the employee. However, the IRS did NOT opine on the legality of this practice. The Department of Labor and the Fair Labor and Standards Act (specifically, see Title 29 of the CFR §531.26-284) preclude a business from paying out regular wages in a manner other than cash.
What if I didn’t know all of this and I haven’t been paying taxes?
Talk to a tax professional and get your liability figured out ASAP. There are penalties for inaccurately reporting income or information on returns. However, self-reporting and paying your prior year tax burdens due to a reasonable misunderstanding of crypto accounting is better than ignoring a problem and hoping it goes away. Note that there is no statute of limitation for fraud. Also, crypto was originally handled by Treasury’s Financial Crimes Enforcement Network (FIN-2013-G0012) before the IRS released a bulletin for taxpayers based on this guidance (Notice 2014–21).
Wait, if everything is anonymous on the ledgers, how will the IRS know much crypto I have bought, traded, sold, etc.?
Considering the IRS’ fight with Coinbase and resulting announcement that the company had to relinquish 13,000 users’ account data just last year, if they don’t know what you have now, they are trying to get it. You may not be a big enough fish, and they may never find out, but Coinbase and Gemini issue Forms 1099 for certain users. PLUS there is an automated system in place that flags taxpayers who receive those 1099s but don’t report crypto on their returns.
What about tokens?
“Token” is a bit of a loaded term and there is substantial confusion because of it. This confusion appears to have delayed any real guidance from the IRS on the topic of cryptocurrency “staking.” For the time being, you have some options on when to report receipt of your tokens for tax purposes. A token holder (“user”) can recognize the income when the token is awarded (when the user has custody/control over the new coin); choose to report the income only when the new coin is sold or exchanged; or do both and adjust the basis of the token by the amount first reported. Speak with your accountant about the options and make sure you are well informed of any new guidance that comes out in the future.
Do states tax cryptocurrency?
Many states reference the Internal Revenue Code for the definition of Gross Income and, therefore, IRS guidance is applicable unless the state code says otherwise. If you have specific state questions, talk to your tax professional or give us a call and we can find and send you the applicable guidance.
What do I do if I owe a lot of money now?
Your options are going to be taxpayer (you) specific. There are tax incentives for certain types of businesses that you may qualify for as well. If you don’t have a business, you may have to get creative. Let’s talk and figure out what you’re dealing with.
This list of FAQs was provided by or friends at:
Co-Founder & COO
Probity Tax Recovery LLC