Click here to read CryptoTax: Events Professionals Ought to Know Part 2
Overstock.com is heralded as the first major retailer to start accepting bitcoin back in January of 2014. Since then several leading e-commerce platforms have followed suit such as Expedia, Shopify, Twitch, and even telecom giant AT&T.
Typically these companies will accept cryptocurrency through payment providers such as BitPay, Coinbase Commerce, and others. Amazon does not (yet) offer crypto as a payment option, however, many e-commerce sites will allow you to buy Amazon and other gift cards with crypto which can then be redeemed at your favorite retailer.
Paypal has been a payment and withdrawal option for several crypto exchanges for years, but recently rumors have been circulating that the fintech giant may “allow buys and sells of crypto directly from PayPal and Venmo”. (On October 22, 2020 those rumors were confirmed.)
Virtual currency such as bitcoin and ether as a means of payment is slowly gaining wider acceptance, but what are the tax ramifications of using crypto as a means of payment for goods and services?
According to IRS Notice 2014-21 “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
Since crypto is treated as property for federal tax purposes, exchanging crypto for a good or service results in a disposal of the crypto, and consequently a short or long term gain or loss would need to be calculated and reported. According to the October 9, 2019, virtual currency FAQs, First-In, First-Out (FIFO) and Specific Identification are acceptable cost basis methods.
Consider this example. You purchased $100 worth of bitcoin with cash on Monday from a popular exchange such as Coinbase. A few days later (let’s say Thursday), you decide to settle your AT&T bill with said bitcoin. Yup, you would need to compute and record the gain or loss derived from the difference between the price you paid to purchase the bitcoin on Monday and the fair value of bitcoin at the time you settled your phone bill. Ouch!
Wait, that’s crazy? I’ll stick with cash and card, thank you very much! I mean, isn’t there some sort of microtransaction threshold exclusion? As it stands now all gains or losses regardless, of size, will need to be reported.
There was an effort back in 2017 by US lawmakers to push through legislation that would essentially allow consumers to make smaller purchases below a $600 threshold, without the related burdensome reporting requirements. However, the bill did not even make it past the House Floor.
In January of 2020, two members of Congress continued their efforts to make it simpler for the people to use virtual currency in their daily lives. They introduced a bill entitled the “Virtual Currency Tax Fairness Act of 2020”. The bill would provide for a de minimis exemption for personal transactions where the gains are less than or equal to $200.
The AICPA also submitted their recommendation in a comment letter to the IRS, “Treasury and the IRS should offer administrative relief by allowing a de minimis exclusion for virtual currency, similar to the exclusion allowed for foreign currency transactions. Tracking small amounts of gain or loss on transactions of low value creates a situation where the administrative costs outweigh any possible tax on the immaterial transactions.”
Unfortunately, there is not that much we can do to expedite the crypto tax regulatory processes. Fortunately, however, what we can do is make it easier than ever before to calculate and track crypto gains, losses, and cost basis across all your crypto wallet and exchange activity. AICPA SOC Certified Ledgible Tax solution can do the heavy lifting for you while giving tax professionals the ability to manage their clients’ virtual currency tax from a portal that integrates directly with the clients’ wallets and exchanges.
Now let's move on to another taxable crypto event: The Swap.
Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.
What Every Tax Professional Ought To Know
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.
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.
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.
Mazars in South Africa Selects Verady’s Ledgible for Crypto Asset Confirmations
Worldwide Leading Accounting and Advisory Firm To Use Ledgible for Confirmation of its Global Clients’ Digital Assets
ATLANTA and CAPE TOWN, South Africa, Aug. 18, 2020 /PRNewswire/ -- Verady, the leading cryptocurrency tax and accounting software company, today announced Mazars in South Africa international audit, tax and advisory firm has selected Ledgible to supply confirmation and reporting around its clients' digital currency audits. Understanding how digital assets align with accounting, reporting and verification is key to the adoption of cryptocurrency worldwide. Ledgible is the bridge between cryptocurrency and traditional financial accounting.
Of the eleven Mazars' offices in South Africa, the Headquarters in Cape Town work with many local and global clients with cryptoassets to manage. Mazars is at the forefront of this emerging industry, providing digital currency and blockchain technology services to both domestic and international clients. Ledgible automatically syncs intricate data directly from hosted blockchains and exchanges for these cryptocurrency holdings and transactions which is used by Mazars to obtain the required audit evidence and assurance over clients' cryptocurrency holdings and transactions.
"Traditional accounting practices, risk based audit procedures and reporting frameworks were not designed for cryptocurrency. Our dedicated team however understands the complex challenges our clients face with digital currencies," said Wiehann Olivier, Partner with Mazars in South Africa. "With Verady's solution, tracking, validating and reporting of digital assets become less complex and to include Ledgible in our portfolio of options enables us to connect data to our existing financial platforms making the auditing process seamless for our clients."
"Ledgible offers Mazars a familiar and traditional financial verification, reporting and assurance tool to manage and report confirmations on the digital assets of their clients," said Kell Canty, co-founder and CEO of Verady. "Having an advanced crypto-accounting platform connects the emerging blockchain space with current financial service requirements advancing the cryptoasset industry."
Read the full article here.
As part of the Wall Street Blockchain Alliance (WSBA), Verady contributes regularly to working papers, education, and other items on important issues around Cryptoassets and their evolving accounting and tax ecosystem in the United States. Recently, the WSBA asked Accounting Working Group members to collaborate in the creation of a response letter to the Internal Revenue Service regarding their Revenue Ruling 2019-24 as well as the subsequent FAQ’s providing guidance on the taxation of virtual currencies. The letter was designed to offer insight and recommendations, from experts in the cryptocurrency accounting industry, on “some of the most prominent outstanding questions or items for which [WSBA members] are seeking further clarification.”
The WSBA is a non-profit trade association based in New York City and the Accounting Working Group consists of leading companies with diverse backgrounds in the areas of accounting and cryptoasset tax, including Verady (represented by our CEO Kell Canty).
The response letter (which can be read in its entirety at https://www.wsba.co/uploads/3/7/9/4/3794101/wsba_irs_response_letter_-_final.pdf) touches on a variety of issues, but leads with thoughts on perhaps the biggest disappointment in the crypto community since the IRS last released guidance… the classification of cryptocurrency as "property." And while the WSBA letter notes that there may not be a perfect classification for cryptocurrency at the moment, the current classification “as property creates additional compliance and reporting requirements that seems to neither add value to the taxpayer nor merchants accepting cryptoassets as payment for goods or services.”
Instead, the letter asks the IRS to consider “establishing a de minimis exemption for both individuals and merchants” that would establish a minimum transaction value threshold for tax reporting purposes, thus lowering the compliance burden on both smaller individual cryptocurrency users and their accounting professionals.
In further analysis Canty noted, “recent draft legislation proposing exemptions based on amount of potential capital gains may further complicate the already complex accounting and reporting issues around cryptoassets by mandating calculating capital gains on every transaction.”
The letter goes on to provide the following recommendations for other important cryptoasset tax implications, including:
“Obviously there is a lot to work through with such a disruptive technology as blockchain. We look forward to continuing the conversation with the IRS to bring clarity and support for guidance around cryptoasset tax. Cryptoassets’ use and adoption will continue to expand and it is vital to have the guidance, compliance, and tools to support them.”
To learn more about the Wall Street Blockchain Alliance, be sure to check out their website at https://www.wsba.co/membership.html.
