Unpacking the confusing elements of cryptocurrency taxation
Practitioners whose clients haven’t gotten involved in bitcoin, ethereum, litecoin or other cryptocurrencies may end up considering themselves very lucky: Cryptocurrency investors must deal with unclear records, tangled blockchain addresses and, in the lightning age of virtual money, ancient tax guidelines.
“I have one client who’s trading them,” said Brian Stoner, a CPA in Burbank, California.
“Most people have heard of them, some are thinking about getting in on it, while many others are scared to death because of all the volatility, There’s a definite risk factor, like buying options on commodities,” Stoner says.
“Not sure if this is going to be an issue or not; it’s still a very sketchy area. Personally, I don’t advise clients to invest in this,” said Becky Neilson, owner of Neilson Bookkeeping & Tax Services Inc. in Sheridan, California. “I think it’s too risky,” she said.
The Mahaney Law blog recently cited research from finder.com that almost 8% of Americans have invested in a cryptocurrency or an initial coin offering. More of those surveyed also see no need to invest in cryptocurrency; almost one in five see it as an outright scam.
LACK OF EXPERTISE
Bitcoin is the most common cryptocurrency investment, with an average holding of $3,450. Slightly more than 2% of baby boomers claim to have invested in cryptocurrency, compared with almost 18% of millennials.
The latter must love a Nantucket sleighride: Since bitcoin peaked at about $18,000 in December, it has lost more than half its value. Bitcoin has roller-coastered in double-digit value in hours. Cryptocurrencies ethereum and litecoin have seen similar fast ups and downs.
Clients who “plugged their noses and jumped in were dismayed at how they seemed to be the only people who lost money,” said Enrolled Agent John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado. “A great deal of fraud at the retail investor level was manifested on the Schedule D,” he said. “Even sophisticated investor groups are getting taken.”
Cryptocurrency tax expertise is still fairly thin, and Internal Revenue Service guidance on digital money is relatively old (2014), but the agency does generally treat cryptocurrencies like property, especially when it comes to taxing what it says are like-kind exchanges, a favorite tactic of cryptocurrency traders. Possible taxes include capital gains or even self-employment tax.
Laurie Ziegler, an enrolled agent at and the managing member of Sass Accounting in Saukville, Wisconsin, has only had a few clients familiar with or dealing in cryptocurrencies.
“The biggest complaint is that if they obtained it by mining it, there’s no basis and any amount realized by the sale of same is all income,” she said.
Self-professed “early adopter and believer in the value of the blockchain-related technologies” Daniel Morris, a CPA and senior partner with Morris + D’Angelo in San Jose, California, has heard several questions about crypto.
“First questions about what it is, why it’s used and its value. Lots of questions in this arena,” said Morris, who works with clients setting up token exchanges, foundations and global improvement enterprises using distributed ledger technology and related technologies.
Clients also want to know how to leverage the technology on- and off-shore, how to protect what they have, using hard or soft wallets, or protecting against sudden incompatibility of different types of coins, a.k.a. “forking” and when to move between and among the various coin offerings, he said.
Other questions and concerns include ways to avoid taxable income from former and current conversions, challenges associated with regulatory drift, “overlap, confusion, jealousy and greed as it relates on how or why the government should be engaged,” Morris said.
‘UNDERSTAND THE RULES’
Morris Armstrong, an enrolled agent and registered investment advisor at Armstrong Financial Strategies in Cheshire, Connecticut, has gotten “a few clients who had the trading crazies. I explained how the IRS has issued guidance on how [cryptocurrencies] are handled and if they’re simply bought and sold, that they are very similar to a stock with long- and short-term gains, brokerage fees or ‘coin-base fees’ added into the price.”
The client response, according to Armstrong?
“‘My friends tell me that the only trades that they have to report are those in U.S. dollars.’ I politely explained that all trades are reportable and if they’re coin/coin the dollar price needs to be available. Ten-minute discussion,” Armstrong said.
The client then produced an Excel spreadsheet.
“I was willing to take the sheet at face value, because it had time and dates in the traded columns. He traded in three coins, and it was easier to import the Excel sheet into my tax software, which generated about 60 trades. The net result was a loss of $70,” Armstrong said.
“Those trading would benefit from understanding the tax rules, which are not complicated for trading,” he said.