Cryptocurrency is prevalent topic news these days, falling in and out
of favor depending on whom you ask. Institutions are decrying it in
one instance and then taking large amounts of it onto their books in
another. Goldman Sachs, Morgan Stanly, JP Morgan, and bank of America-
to name a few – have all dipped their toes in the volatile crypto
Moreover, as the value of the various stable coins and
cryptocurrencies pings up, down, and sideways, retail investors have
been getting in on the act, not wanting to miss out on the big things
or rug pull for the less fortunate.
If anything, the retail market’s interest in virtual currencies will
mean CPAs can expect to deal with the tax logistics come tax season,
and we asked some CalGPA members for their comments on the topic to
help you get your mind around what you might expect. We received input
from CalCFA Personal Planning Committee Member Dan Herron. CPA/PES CEP
(partner, Better Business Financial Services: principal. Elemental
Wealth Advisors) and Moss Adams Senior Manager Erik Weinapple, who
recently gave a presentation on the topic to CalCPAs Committee on
A Q&A with Erik WeinappleWHAT DO YOU THINK CRYPTO REGULATION MIGHT LOOK LIKE?
It’s hard to say. the current infrastructure bill is attempting to
redefine the definition of a broker and possibly push cryptocurrency
exchanges like Coinbase and others to begin reporting 1090 information
to the IRS on behalf of their customers, similar to what traditional
brokerages are currently required to do. I think that’s the start. The
hard part will be figuring out regulations that will help track
information without being overly burdensome to the crypto space and
electively slow down innovation. Some traditional rules will be hard
to follow special in the decentralized finance (DEFI) space whereby
there are no real service providers and “customers” interact directly
with a protocol rather than with a human.. Forcing 1099 tracking to
KYC rules on these types of platforms may be impossible or if
possible, overly burdensome to the industry.
WHAT ARE THE TAX IMPLICATIONS SURROUNDING CRYPTOCURRENCY?
That’s a loaded question since it all depends on what you’re doing
with crypto. If you buy and hold as a long-term investment, you’re
likely going to see similar treatment to if you bought and sold stock.
If you are mining or staking crypto, then you’d likely end up with a
trade or business income treatment under Tax Notice 2014_21. I’d
recommend reviewing Tax Notice 2014-21, along with the IRS FAQs as a
start for guidance on how to treat cryptocurrency transactions.
Currently, there is no specific guidance on how NFTs (non-fungible
tokens) are treated. However, one could glean from traditional rules
and refer to my initial thoughts of it depending on what you are
doing. If you’re purchasing digital art, this may be deemed to fall
under the IRS’s definition of a collectible, which has an even higher
tax rate than that of stock or other digital assets if held long-term.
WHAT SHOULD CPAS BE WARY OF THEIR CLIENTS?
I’d say one of the most overlooked and scary compliance issues that
come up is when somebody opens a large number of accounts on various
platforms are headquartered outside of the U.S., those accounts may be
deemed to fall under the definition of a foreign financial institution
and may be subject to the FINCEN 114 (Foreign Bank Account Reporting)
filing requirements. If you miss reporting a foreign account, then you
could be subject to fines and penalties of $10.000 or more for not
HOW SHOULD BE PREPARED TO DEAL WITH CRYPTOCURRENCY?
CPAs are going to run into clients opening dozens of new accounts
trading new digital assets that the IRS has no guidance on. I
recommend having a discussion with clients before year-end to get a
beat on what activities they’ve been involved with regarding crypto.
Chances are if you had a client that traded crypto in 2020, they’re
probably on to a dozen new things in the DEFI space such as staking,
liquidity pools, or yield farming. What I like to ask is that the
client or prospect provide a summary of all of the crypto accounts and
activities. I think it’s also helpful to suggest (if your client isn’t
already doing so) to track their crypto transaction with a third-party
crypto tracking software. There are many out there that have been
keeping up with all the new DEFI products.
Crypto Thoughts, By Dan HerronON TAX REPORTING:
Since there are no 1099-Bs issued (which there should be), investors
don’t put 2 and 2 together that they need to report their sales. We’ve
had to amend returns because we discovered sales in prior years. There
are companies that will compile the transaction into Schedule D and
Form 8949 (Coin tracker, token tax, Zen Ledger, etc.).