By: Jason Schneider, CPA, Partner, Osborne Rincon CPAs
Cryptocurrency (crypto) has been a hot topic in the news cycle for the past few months, and there is still much confusion surrounding the tax implications of dealing in crypto. In general, cryptocurrency is a digital currency that can be used to purchase goods and/or services. The transactions are conducted online and maintained using a technology called “blockchain.”
Most of the allure in cryptocurrency right now is as a trading vehicle with the intent to buy into it when the price is low and sell when the value goes up – much like a traditional security such as stocks or bonds. Because stocks represent actual ownership in a company and bonds represent an investment into a municipality or project, they enjoy favorable tax treatment under the capital gain/loss regulations.
On the other hand, cryptocurrency is not a physical item so there has been confusion as to how it would be treated from a tax perspective. The IRS stepped in with a ruling in 2014 which defined cryptocurrency as property which allows certain benefits under the tax code – the biggest being in capital gains treatment.
The most basic scenario would be buying and selling crypto in the same manner that securities are bought and sold. The original purchase price is the basis, and the gain is calculated by subtracting the basis from the eventual sales price. To the extent the crypto was held for more than one year, the gain is then taxed at preferential capital gains rates (0%, 15% or 20%) and any losses would be available to offset any capital gains that have been realized throughout the tax year. Where crypto starts to get complicated is when it’s used in other ways.
· If your employer pays you in crypto, the fair market value of the coin on the date you receive it is taxable income and will be listed on a W-2 as wages.
· If you mine crypto, the fair market value of any coin you can mine is considered income and must be picked up on the tax return.
· If you use crypto to purchase goods or services, the difference between the cost basis of the crypto and the value of the goods and services is taxable as a capital gain/loss for each transaction made.
There is no doubt the crypto market is highly volatile and potentially very lucrative, but there are many pitfalls to be aware of when dealing in these markets. The IRS and FBI have gotten much better at tracking crypto transactions and have made it a focus of enforcement due to the lucrative opportunities it provides. If you have been dealing in cryptocurrencies, it would make sense to reach out to your professional tax provider and have a conversation about what the implications might be.
If you need a tax advisor to ensure you are informed on all the latest tax requirements, please contact Osborne Rincon at (760) 777-9805.