By Jason Wang, CPA
Cryptocurrency has been growing in popularity and the trend is likely to continue. Though some appreciate this new trend, others decided to crack down on it. The cryptocurrency boom of 2017 attracted a lot of attention and made headlines in the media. Some investors capitalized on the emerging trend and made huge profits from it. So, of course, the IRS decided it wanted its share through cryptocurrency taxation. To this end, the IRS is actively trying to obtain any customer account information it can through the cryptocurrency exchanges that are made.
If getting involved in cryptocurrencies is something you’ve been thinking about, it’s essential for you to know that, as a taxpayer, there are tax implications associated with the cryptocurrency transactions you make. In Notice 2014-21 and Notice 2014-36, the IRS has addressed the taxation of cryptocurrency transactions. For federal tax purposes, virtual currency is treated as property. While you’re probably aware that you’ll have a capital gain or loss when you sell it, what you may not realize is that using cryptocurrency to purchase goods and services also triggers a taxable transaction. This can be a challenge if you use cryptocurrency for everyday purchases, as it would require you to track your cryptocurrency basis and purchases which might ultimately make filing your tax return more complicated.
The character and treatment of the gain or loss for cryptocurrency taxation purposes depends on a variety of factors. This becomes particularly important when a loss is realized on a transaction, as a loss is only deductible when cryptocurrencies are used for investment or business purposes. That means that losses are disallowed when cryptocurrencies are used to buy personal items.
Some taxpayers decided to take the risk of deferring gains by using Section 1031. While the IRS has been silent on whether cryptocurrencies qualify for this, the Tax Cuts and Jobs Act of 2017 effectively made this a moot point when it limited like-kind exchanges to real estate transactions.
Another thing to keep in mind is that businesses which use cryptocurrency to pay employees and contractors are still subject to the W-2 and 1099 filing requirements.
The United States tax system is already extremely complicated, and the Tax Cuts and Jobs Act of 2017 doesn’t make it any easier to understand. With the taxation of cryptocurrencies entering into the picture, taxpayers and accountants will likely have more headaches to deal with. The future is uncertain and so is the market for virtual currencies so it’s always wise to check with your tax advisor before jumping into these untested waters.