Individuals and companies from all over the world are dealing with cryptocurrencies either for investment purposes, as part of their businesses or for fun. Regardless of the reason, many of these crypto transactions are taxable events. This includes crypto-to-crypto trades, income from mining and yield farming, staking, receiving new tokens or airdrops, and income from other De-Fi activities. It also includes any appreciation in value from the sale or disposition of your cryptocurrencies. Failure to report your income or earnings from these transactions or falsely reporting crypto transactions could lead to an investigation by the Internal Revenue Service (IRS).
To protect themselves, many individuals and businesses seek the services of a Cryptographic Certified Public Accountant (CPA). With that being said, CPA experience in the crypto industry is very scarce due to the newness of this field. As a result, it is critical to do your due diligence before hiring a crypto CPA, whether your crypto CPA is preparing your company’s taxes or acting as your authorized representative with the IRS. This article outlines the most important factors to consider before hiring a crypto CPA.
10 points of consideration
In 2014, the Internal Revenue Service (“IRS”) issued the first guidance on cryptocurrencies which concluded that crypto transactions are taxable events and should be treated as “property” for federal income tax purposes. Over the years, the IRS has been encouraging and then aggressive in reminding people to report and pay taxes on their crypto transactions. Starting in tax year 2019, the IRS added a new question about Form 1040 which specifically asks taxpayers if they received, sold, sent, traded, or acquired any financial interest in any cryptocurrency or “virtual currency.” The coming fiscal years have been confusing and unsettling for taxpayers. People are unsure how the IRS will respond to their interpretation of the tax code regarding their crypto transactions. Therefore, CPAs with cryptocurrency skills are in high demand. Below are ten things to consider before hiring a crypto CPA:
Ask your crypto CPA how the IRS is currently treating crypto for tax purposes.
Since 2014, the Internal Revenue Service (IRS) has made it clear that it is treating transactions in cryptocurrencies, or “virtual currencies,” as property. This means that the receipt or purchase and sale or disposition are taxed similar to how a car or house would be. Cryptocurrencies are not a currency. Your crypto CPA should explain this and the consequences of it to you.
Understand and take the approach that every crypto transaction can count as a taxable event and ask your crypto CPA to provide you with a broad overview of crypto taxes.
The sale of virtual currencies or cryptocurrencies is not the only time when cryptocurrency transactions are taxed. Anytime your cryptocurrencies are transferred out of your wallet, exchanged for fiat or other cryptocurrencies, or otherwise changed wallets are examples of taxable events. Improper recording and tracking of these FMVs at the date of purchase, sale, and disposition could be devastating.
Make sure you know how to calculate your tax base and how your CPA uses the base to record crypto transactions.
Your cost basis on your crypto is the amount you spent to purchase the crypto, including fees. Over time, your adjusted basis increases due to expenses and decreases due to credits and deductions. When you sell your cryptocurrency, your gain or loss is calculated by subtracting your adjusted basis from the FMV at the time of the sale. IRS Publication 551, Basis of Assetsprovides more information.
Federal agencies’ views on cryptocurrencies are inconsistent and uncertain. Crypto CPAs need to accept this, stay abreast of legislative changes, and guide their clients accordingly.
The IRS and the SEC are the two main federal agencies that publish guidance and interpretations on cryptocurrencies. When it comes to blockchain technology and cryptocurrencies, the SEC’s perspective focuses about investors, investment advisers, brokers, capital markets and stock exchanges, and transfer agents. The IRS tends to focus on the use of cryptocurrencies as a medium of exchange, unit of account, and store of value, as well as on the various tax reporting and disclosure requirements for cryptocurrency transactions. Crypto CPAs should be aware of the current approaches, interpretations, and enforcement processes of these two federal agencies.
Learn about the difference between crypto transactions that are generally ordinary income and crypto transactions that are treated as capital. Make sure your crypto CPA can pass on this information.
In general, anything that is mined, staked, earned from free token giveaways, airdrops, or initial coin offering (ICO) proceeds is ordinary income. Once you own any of those items and then sell or dispose of them, the crypto transaction is now treated as capital, which will be either a long-term or short-term capital gain or loss, depending on how long you have held them. .
Ask how, when and under what circumstances you would have to recognize a gain or loss when you sell your cryptocurrency for real currency.
When a taxpayer sells crypto, they must recognize capital gains and losses on the sale, subject to limitations on deducting capital losses. This amount, as his crypto CPA should be able to explain, will be the difference between his adjusted basis in crypto and the amount he received in exchange for virtual currency. The IRS Publication 544, Sales and Other Disposals of Assets provides more information on this topic.
Ask about the cryptocurrency software your crypto CPA uses, including how they reconcile their clients’ profits and losses.
Cryptocurrencies and blockchain applications are new technologies that have not been fully grasped by all investors, federal agencies and CPAs. A good CPA will address these new technological applications with specialized software tailored to cryptocurrency tracking. If your crypto CPA says that they reconcile crypto transactions by hand, consider it a red flag. Tracking FMV across multiple exchanges for numerous cryptocurrencies is virtually impossible without specialized technology software.
Crypto transactions could open the door to several additional reporting and disclosure obligations under federal law.
Some cryptocurrencies will satisfy the SEC’s definition of “security” and therefore will need to be registered or exempt. Also, if you host an online platform that sells cryptocurrencies that are considered “securities,” the SEC may want your platform to register as an “exchange” and the people who operate and manage the platform to register as “brokers.” or “investment advisers,” in certain circumstances, under the federal securities laws and the Investment Advisers Act.
Depending on what you or your business do with cryptocurrencies, additional obligations beyond IRS tax filing and SEC registration may be required. Your crypto CPA should convey this to you thoroughly.
If your business involves certain crypto transmission services conducted on behalf of buyers and sellers, you may be required to apply for a money transmitter license under the Bank Secrecy Act and FinCEN rules. However, if you are simply using your crypto to expand your business or pay employees, this requirement may not apply. Lastly, if you hold crypto in a forex account, you may be required to file an FBAR at FinCEN Form 114, Report of Foreign Bank and Financial Accounts.
Ask around and make sure you understand, and your crypto CPA can explain how federal agencies like the SEC and IRS are going after people and businesses involved in crypto transactions.
There is no uniform or comprehensive legislation on cryptocurrencies. Instead, federal agencies are using existing statutes to regulate and investigate crypto transactions, as well as for their enforcement efforts. Notably, the SEC has published a framework that helps him and people understand how and when registration applies to coins, tokens and other virtual assets.
“The IRS takes the position that US taxpayers seriously underreport or misreport crypto income. As a result, it has responded by ramping up its investigations into tax evasion and false tax reporting. Taxpayers who fail to file or file false tax returns face fines and criminal penalties. In addition to the IRS, the IRS often works in conjunction with other federal agencies such as the SEC or DOJ and the FBI where the taxpayer engaged in criminal conduct. If you need help with your taxes or need a representative to act on your behalf with the IRS, it’s important to do extensive due diligence when selecting a crypto CPA.” – Dr. Nick Oberheiden, Founding Attorney, Oberheiden PC
Hiring a crypto certified public accountant (CPA) is an important event, whether you need tax preparation services involving complex crypto transactions or the IRS has marked you for an exam and you need a CPA with experience in crypto transactions to act as your authorized representative. Your crypto CPA should have knowledge of tax laws and should be able to explain the basic IRS strategy and approach towards cryptocurrencies, as well as advise you on which of your crypto transactions lead to tax liability. Individuals and businesses that do multiple cryptocurrency transactions should think carefully about the cryptocurrency CPA they retain, for example, by considering the ten tips in this article.
Oberheiden PC © 2022 National Law Review, Volume XII, Number 104