The Internal Revenue Service (IRS) issued its first guidance on cryptocurrencies, or “virtual assets”, in 2014, where it concluded that virtual currency transactions will be treated as property for federal income tax purposes. It took the IRS about five more years of issuing additional releases before he officially included the following question for taxpayers to answer on their 1040 forms: “At any time during [the taxable year]received, sold, sent, exchanged or acquired any financial interest in any virtual currency?”
If you need help reporting your crypto transactions, you could benefit from the services of a crypto tax attorney. That said, before hiring the first crypto tax attorney who claims to have experience in the field, taxpayers should do their due diligence and make sure to ask crypto tax questions. This article explains the key questions to ask every crypto tax attorney before deciding which attorney to hire.
Ask before hiring
Before hiring a crypto tax attorney to help you handle your cryptocurrency transactions, be sure to ask the following questions:
What federal compliance obligations apply to me and my cryptocurrency business?
Before hiring a crypto tax attorney, be sure to ask questions about their knowledge in the area of digital currency, as well as an overview of general compliance obligations that may apply to you and your cryptocurrency-related business. While you should test your attorney’s knowledge, beware of certain red flags, such as attorneys claiming to know everything about cryptocurrencies and claiming to be experts in the field. Since there is no comprehensive legislation or “crypto law,” federal agencies and courts rely on existing statutes for their investigations. As a result, the best crypto tax attorneys are those who can understand the existing statutes and apply them to your cryptocurrency transactions.
Do I have any other federal compliance obligations besides IRS tax reporting requirements?
In addition to the multitude of tax reporting obligations for “virtual currency” transactions, your business may also be subject to SEC and FinCEN rules. For example, if you are issuing tokens, you will have registration obligations with the SEC. If you engage in money transmission services, you may be required to obtain a license as a money transmitter under FinCEN and design and implement an AML Compliance Program under the Bank Secrecy Act (“BSA”). Ask your attorney if the facts of your case imply any of these additional obligations and, if so, how he plans to address them.
I am planning to launch an ICO. What are my tax filing obligations?
An ICO is an initial coin offering. This occurs when a company or individual(s) launches a new coin or token to finance a project or development. Buyers typically purchase the coin or token with fiat currencies or other cryptocurrencies. ICO proceeds are reportable and taxable. An experienced cryptocurrency attorney should be able to advise you if, if anything, you will need to register your coin/token as a “security” under federal securities laws. By doing so, your attorney can structure your coin/token as a “utility token”, which is not a security and does not have to be registered, as opposed to a “security token”, which is a security and does not have to be registered. .
Can you help me organize the income of my mining company?
If you operate a mining business, it is imperative to have an experienced crypto tax attorney for tax purposes. Crypto mining businesses are unique in that they are subject to two taxable events: (1) first at the time the coin is mined, which is reported as ordinary income, and (2) second at the time the coin is mined. currency is sold or otherwise disposed of, which is reported as a capital gain or loss. This is a very complicated tax filing process and you should ask your crypto tax attorney to explain it to you in detail before you hire him.
Can I get any deduction for my crypto mining business?
Ask your tax attorney if your crypto mining business, or other crypto-related business, can receive customary business deductions under IRC Section 162. Your attorney should be able to outline the most applicable deductions for crypto mining companies, for example. This includes, at a minimum, equipment, office space, rent, electricity, mining pool fees, and office supplies.
Is there a way to get more deductions or preferential treatment for my cryptocurrency transactions?
In addition to looking for the usual business deductions or other typical tax deductions and credits, a good crypto tax attorney has a solid understanding of the tax code and uses it to apply additional deductions and credits to your case. This may involve offsetting your capital losses with capital gains and some of your ordinary income to lessen your overall tax liability.
Is it better to classify my crypto income as investment income, rental income, or interest income?
This is a debatable topic and one that should be explained to you in detail by your crypto tax attorney. While income generated from cryptocurrency-related activities could be investment income, it could also be rental income (if treated as property income since cryptocurrencies are treated as “property”) or interest income (if treated as property income). treated as interest earned on a savings account). bill). This distinction is important because it affects how income is reported.
I deal with international cryptocurrency and currency transfers. How does this affect my tax filing obligations?
Your attorney must have a firm grasp of not only domestic crypto transactions, but international and cross-border transactions as well. This is very important for cryptocurrencies as it is very easy to transfer cryptocurrencies to foreign accounts across international borders in a matter of seconds. Also, many online crypto exchanges are foreign exchanges; therefore, you may have obligations under FinCEN to file FBAR forms or forms indicating whether you brought foreign currency into the United States. If this applies to you, make sure your crypto tax attorney can explain it to you.
Do you have cryptocurrencies?
This question may sound strange, but it is important. Use this question and the lawyer’s answer to gauge your enthusiasm for cryptocurrencies. If your attorney does not own, invest, or deal in cryptocurrencies other than for clients, their inside knowledge can only extend so far.
Can you describe your experience in providing compliance advice and tax services for cryptocurrency companies?
Make sure your crypto tax attorney is experienced in providing services in this new area. While this is still an emerging area with little-known and inconsistent federal regulation, you will still want to enlist the services of an attorney who has had some experience helping clients with blockchain and cryptocurrency compliance. This is especially important when it comes to crypto transaction tax reporting.
“Reporting your crypto tax transactions is one of the most complicated areas on one’s tax return. If done falsely, the IRS could launch a lengthy audit or investigation and issue fines and penalties, not to mention the reputational damage it could cause to your business. To ensure you are correctly reporting your crypto transactions, you need a crypto tax attorney.” – Dr. Nick Oberheiden, Founding Attorney at Oberheiden PC
Reporting cryptocurrency transactions is something many taxpayers struggle with. This has led to an increase in IRS investigations for failing to report or falsely reporting cryptocurrency transactions. Crypto fraud and filing (or failing to file) false tax returns are serious charges that can lead to irreparable reputational damage and fines and penalties. Before making the decision and choosing a crypto tax law firm and attorney, make sure you do your due diligence. This includes asking exhaustive questions about your attorney’s knowledge, experience, understanding, and passion for cryptocurrency and tax law.
Oberheiden PC © 2022 National Law Review, Volume XII, Number 88