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 waters.
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 Taxation.
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 reporting.
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 (Cointracker, token tax, ZenLedger, etc).