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Tax professionals that have been on the fence on whether to take the plunge into crypto tax and learn how cryptocurrency works need to look no further than the first page of the new 1040 return!
The IRS moved the virtual currency question to the top of page 1 of the draft 1040 return for the 2020 tax year. Right below name and address! An unequivocal signal to the importance and priority of crypto tax to the IRS.
During 2019 we saw the IRS sending out over 10,000 warning letters to cryptocurrency users to file amended returns if appropriate and pay back taxes. “Virtual currency” was also included in the 2019–2020 IRS Priority Guidance Plan. Whichever way you slice it, crypto tax is a top priority to the IRS.
The challenge is, relatively few tax professionals in the U.S. have been investing the time to learn how cryptocurrency works.
That can mean at least TWO things for the tax professional’s business.
Firstly, If you’ve not been upskilling yourself in virtual currency and you need to tick “Yes” to the question on page 1, you risk losing a lot of business to your competitors. Competitors that have chosen to educate themselves and stay current with virtual currency and crypto tax developments.
Secondly, for those tax professionals that have chosen to stay current, up-skill themselves, and learn how cryptocurrency works, there is an incredible opportunity to grow your practice! Tax professionals have reported significantly increasing their hiring to deal with the influx of crypto client demand.
In 2014, the IRS issued Notice 2014-21, the first notice addressing “virtual currency” or cryptocurrency. The notice states that cryptocurrency is to be treated as property, rather than currency (that could generate foreign currency gains or losses) for US federal income tax purposes.
The unique makeup of this novel emerging asset class coupled with the breathtaking speed of developments and innovation in the crypto space has kept regulators playing catch-up.
In an attempt to address some of the regulatory ambiguity around key tax issues in the crypto space, such as hard forks, airdrops, the IRS released updated guidance in October 2019, in the form of a Revenue Ruling 2019-24 and updated FAQs.
Yes, one may argue that the latest guidance still leaves much to be desired, but at least there is progress. The AICPA published an insightful comment letter to the IRS in February 2020, touching on much of the remaining areas in need of further clarity.
Tax pros that are leading the way in crypto tax compliance and thought leadership suggest the best way to learn crypto is to actually get some “skin in the game”. Meaning, do not try the “textbook only” approach!
One needs to actually buy/sell/trade some crypto to gain a proper understanding of how it works. This is especially important given the novelty and complexity of cryptoassets.
A great place to get started is the 8 Key Crypto Taxable Events Series brought to by Ledgible Tax, a software tool built specifically to empower professionals to provide a premium crypto tax service to their clients.
