Wikipedia Definition: A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.
The internet allows us to store information in the cloud and buy and sell goods with digital money. In one sentence are three things you can’t see or touch. Starting with Notice 2014-21, Treasury guidance [1] and tax form instructions are slowly adding rules to track digital money and transactions of US citizens. The forms are the same; the terminology and transactions are different.
Terminology challenges for tax law:
- Hard Forks,
- Wallets,
- Blockchain,
- Crypto,
- Tokens
- Bitcoin, and
Items to be reported with your return:
- Ownership of cryptocurrency,
- Payment made or received with digital funds,
- Exchange of one type of currency for another, and
- Sell of currency.
This could include:
- Disclosures,
- Capital gains or losses,
- Earned income, or
- Asset basis or cost.
Difficulties involved:
- Reporting requirements for trading by crypto platforms,
- Accumulating the detailed cost basis,
- Calculating gain or losses by transaction, and
- Timing for income recognition.
In an ongoing case,[2] a taxpayer originally paid tax on staking rewards and then filed an amended return to remove the income and the IRS issued a refund as the government did not want to defend the position that tokens created by staking were taxable income. The taxpayer refused the refund and has decided to take this to tax court to get a formal ruling in order to create a precedent for other stakers and protect himself from future IRS scrutiny. The question presented was timing of income recognition. Does the receipt of tokens generate income upon receipt or upon use? An example presented for illustration was the products made by a baker. Does income occur when the bread is baked or when it is sold?
The rules are slowly evolving. We have tax consultants with experience with reporting in this emerging financial frontier.
IRS Resources: Frequently Asked Questions on Virtual Currency Transactions | Internal Revenue Service (irs.gov)
[1] FinCen
[2] Jarrett v. United States
The HoganTaylor Tax Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com. You may also contact Denise Felber, Tax Partner, at dfelber@hogantaylor.com
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
