Deciphering Crypto Tax Issues
As the world of cryptocurrency and decentralized finance (DeFi) continues to evolve, it’s important for accountants to stay informed about the tax implications of these new technologies.
First and foremost, it’s important to understand that cryptocurrency is considered property for tax purposes. This means that any gains or losses from buying, selling or trading cryptocurrency are subject to capital gains tax. For example, if a client buys one Bitcoin for $10,000 and then sells it later for $15,000, they would have a $5,000 capital gain and would be subject to taxes on that gain. Also, if a client buys one Bitcoin for $10,000 and swaps it for another cryptocurrency when the value of Bitcoin is $15,000, you still must report a $5,000 capital gain. Any time there is a crypto-for-crypto transaction, it is looked at as if the original cryptocurrency was sold at the current fair market value and the newly acquired cryptocurrency was purchased at the same value.
Another important thing to keep in mind is that cryptocurrency transactions are subject to the same reporting requirements as other types of property transactions. This means that clients need to report any gains or losses on their taxes even if they didn’t convert their cryptocurrency to fiat currency. Additionally, if you receive cryptocurrency as payment for goods or services, that is considered income and will likely be subject to self-employment taxes after applicable deductions.
DeFi is a rapidly growing trend in the crypto-currency and blockchain space that aims to provide financial services without the need for centralized intermediaries. It relies on decentralized networks and protocols, smart contracts and decentralized applications (dApps) to enable a wide range of financial transactions and services such
as lending, borrowing, trading and insurance. It is important to keep in mind that transactions that occur on DeFi platforms are still considered taxable events, and the value of the assets involved should be reported as income or capital gains depending on the nature of the transaction.
Non-fungible tokens (NFTs) are a type of cryptocurrency that represents a unique digital asset, such as a digital artwork or collectible. The sale of NFTs is subject to capital gains tax, just like the sale of other types of property. However, it’s important to note that the tax treatment of NFTs can vary depending on the specifics of the transaction. For example, if an NFT is considered a collectible, it may be subject to collectibles tax, which is typically higher than capital gains tax. It is not uncommon for NFTs to also be part of DeFi in the form of “staking” which allows the owner of an NFT to deposit into a smart contract and earn cryptocurrency tokens over time, not unlike an interest-bearing account.
Another issue that can arise with cryptocurrency taxes is the lack of clear guidance from the IRS. While the IRS has issued some guidance on crypto taxes, there are still many unanswered questions and gray areas. This can make it difficult for individuals and businesses to know exactly how to report their crypto transactions. As accountants, it is important to stay up to date on any new guidance or regulations and to consult with a tax professional with experience in crypto tax issues when necessary.
It is also important to be aware that different countries have different tax laws and regulations when it comes to cryptocurrency and DeFi. For example, some countries have implemented specific regulations or taxes for the sale of NFTs. It is essential for accountants to be aware of the tax laws of the countries that clients live in, as well as any other countries where they have crypto holdings or conduct crypto transactions.
Nicholas J. Young
Nicholas J. Young, CPA, is the managing member of WAGM.Tax LLC. He is a member of the NJCPA.
This article appeared in the Summer 2023 issue of New Jersey CPA magazine. Read the full issue.