Crypto Tax Series - Part 2
What Every Tax Professional Ought To Know
Crypto Is Booming (Again)
Payments company Square, Inc. first allowed Cash App users to purchase and sell bitcoin during the rampant crypto boom of 2017. Since then it has continued to invest in its bitcoin offering, a move that seems to have yielded profitable results!
According to Square’s 2020 Q2 SEC filing, for the six months ended June 30, 2020 and 2019, bitcoin revenue amounted to $1.2 billion and $191 million respectively. The financials indicated that the primary driver behind the soaring 520% increase “was due to growth in the number of active bitcoin customers, as well as growth in customer demand”.
Of course Square is just one of the myriad options available for users to trade crypto today. Coinbase for example, one of the largest and most popular crypto exchanges in the U.S. boasts over 35 million users and over $7 billion in custody.
Yes, Crypto Tax Is A Priority For The IRS
The majority of crypto users are uninformed when it comes to the potential tax consequences surrounding crypto. Some think that the IRS will not be able to track or trace their trades back to their identity (ouch!).
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. The IRS recently also released the 2020, 1040 draft form, where we can see the virtual currency question has moved from Schedule 1 to near the top of the main form, right under the name and address, asking, “At any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?”. “Virtual currency” was also included in the 2019–2020 IRS Priority Guidance Plan. These are all unmistakable signals that the IRS is prioritizing crypto.
Taxable Event: The Sale
So, let’s begin with the basics. Selling crypto for fiat (e.g. USD) is a taxable event. The character of the gain or loss depends on whether the crypto is a capital asset (e.g. stocks, bonds, and investment property) in the hands of the taxpayer and the length of time the position was held.
For example, “hodling” (slang in the crypto community for holding the crypto rather than selling it) crypto as a capital asset for longer than a year before selling it will generally result in a long-term capital gain or loss. If the crypto was not held as a capital asset, but rather as inventory for sale in a trade or business, the resulting gain or loss recognized will generally be ordinary in character.
Tools like Ledgible Tax exist to help tax preparers segregate and correctly classify crypto gains and losses. In the world of crypto tax there are many more taxable events than simply selling their crypto for cash. Let’s take a look at some of the other most common transactions in crypto that may result in taxable events.
Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.