By Adnan Akhand, VP of Accounting and Compliance at BX3 Capital
It is amazing to see how much technology has advanced in such a small span. I was a teen during those days of the Internet back when you had to wait what felt like an eternity for the dial-up to connect — only to be kicked off when my mom picked up the phone. While the popping and screeching of getting online and should you ever log on, the 64-bit graphics that awaited you seemed quaint in comparison to the live streaming and e-commerce we have today, the dot-com boom of the late 90s and early 2000s brought with it a new vitality and dimension to the career plans of the older Millennial generation. The Internet was a revolution — one in which I hoped to have the chance to jump onboard and with any luck — reap the financial benefits thereof. A matter of years later, I’d land my first full-time accounting job shortly after graduating from college in 2008 into the throes of the financial crisis.
A decade later, my revolutionary dreams came true. I came on board at crypto and blockchain business advisory firm BX3 Capitalas its new vice president of accounting and compliance. Until that point, my experience in crypto was limited to personal investments, though I knew that I was on the cusp of effecting massive change for businesses and institutions as well.
Unfortunately, government regulators do not share our enthusiasm. At the very least, they are in less of a hurry to see the space mature properly. We can debate the merits of so-called Big Brother oversight until we are blue in the face. Like it or not though, at the end of the day, for blockchain and cryptocurrency to flourish and gain widespread adoption, clear guidance and regulation need to be in place. The lack of a codified crypto tax playbook makes cryptocurrency accounting an untrodden path, to say the least. This past year has been an incredible experience. I look back at it with two main takeaways: First, the people in this space are some of the most intelligent and motivated people I have ever met. Second, they could use some assistance in maintaining financial records in accordance with U.S. GAAP.
1. If You’re Not Sure — Keep Track of It
How to stay crypto compliant with the IRS
One of the most important pieces of advice I can offer when it comes to accounting for cryptocurrency transactions, especially for businesses, is to maintain detailed records. While record-keeping is a general imperative for accounting across the board, it’s particularly important for digital currencies: Most crypto wallets are not easily identifiable since they are a long string of numbers and letters. Maintaining good accounting practices thus will help ensure accurate financials and prevent headaches down the road. The last thing you want is to find yourself at 10:30 pm on April 14th scrambling to find and assemble financial statements. At that 11th hour, you might be pondering an extension. That tack is all well and good, though you’ll still be on the hook for your full tax liability by the original filing deadline.
2. Know The Filing Requirements in Advance
Another important consideration businesses need to be mindful of is the 1099-MISC filing requirement in the beginning of each year. In general, a business is required to file 1099's for any contractor or service provider to whom they paid more than $600 during the fiscal year. Generally speaking, most purchases of goods and services from C-Corps are exempt from this filing requirement. For those providers who are not exempt, a Form W-9 is necessary. Form W-9 asks providers for their legal name, taxpayer identification number (TIN), federal tax classification type, and address; along with a signed certification that all of the above is true.
When sending payments via a bank, most of this information has already been taken down, helping users stay ahead of their recordkeeping. Most of this information is required when sending payments electronically through a bank, but all you need to send payments via crypto is a wallet address, which will do you no good when filing 1099's. For this reason, it is important to obtain a W-9 before remitting payment.
Crypto can and will be revolutionary, but until we see clear crypto-based guidelines, we in the community need to be as diligent as possible in how we report crypto transactions.
Reporting cryptocurrency transactions on US taxes
It is important to keep in mind that the IRS has classified virtual currency, which includes cryptocurrency, as property per IRS Notice 2014–21. This means nearly every transaction conducted using crypto is a taxable event, including crypto-to-crypto exchanges. The crypto industry boom in 2017 prompted many exchanges to develop tax reporting tools for their clients. Those of us who lived through the 2017 filing season welcomed this utility. In addition, the added ability to download reports specifically for Form 8949 makes filing tax returns with crypto transactions easier than ever.
Form 8949 provides the required reconciliation of capital gains and losses reported on Schedule D of a business or personal tax return. Just make sure you use the FIFO (First In, First Out) method, typically the most conservative — that is, least likely to incur IRS scrutiny — approach to accounting. The Form 8949 report also streamlines the process of incorporating transactions into statements on your tax return. Luckily, the IRS allows attaching statements in a format similar to Form 8949. The actual form only allows for 14 transactions per page. For many of us who operate or invest in crypto, that could translate to hundreds of pages of Form 8949. The reason comes down to two main points:
- First, crypto trades of altcoins typically require conversion to more mainstream crypto prior to exchanging for fiat. This produces at least one extra transaction each time an altcoin is traded for fiat.
- Second, because of the high volatility in the asset class, because of the high volatility, in crypto, trends tend to occur much more frequently than in other tradable assets such as stocks.
3. Don’t Forget Your Airdrop Earnings
Another important consideration this tax season is how to account for airdrops and forks. An airdrop might feel like a gift when received. Unlike cash gifts, which get some great federal tax exemption benefits, airdrops are fully taxable upon their sale. Since the airdrop was essentially free, your cost basis is zero, which means Uncle Sam will tax you on the entire sale price as capital gains. This concept brings me to another important point: We need to take into account the difference between short- and long-term capital gains and losses. In general, a short-term capital gain or loss occurs when you buy and sell an asset in less than 12 months. A short-term capital gain is considered ordinary income in the eyes of the IRS, meaning it is taxed at the same rate.
Something that will be music to to former HODLers’ ears: a long-term capital gain occurs after selling an asset held for more than 12 months. Depending on your overall income tax bracket, long-term capital gain tax rates are 0, 15, or 20 percent. In comparison, ordinary income maxes out at a 37 percent tax rate. Long-term capital gain tax rates are the reason behind the infamous Warren Buffett quote that he pays a lower tax rate than his secretary. It is also why implementing a strategic trading plan with capital gains in mind can pay huge dividends. Just make sure you use the FIFO method, which is typically the most conservative approach when trading assets including crypto. You may be leaving a lot of fiat on the table by not waiting until your assets hit the 12-month mark.
Crypto can and will be revolutionary, but until we see clear crypto-based guidelines, we in the community need to be as diligent as possible in how we report crypto transactions. Maintaining good records will make producing tax required documents a much easier endeavor. This includes annual tax returns, 1099s, and any supporting schedules such as Form 8949. Prioritizing tax and accounting compliance shows the world that crypto is serious business — and indeed the next serious tech revolution. No screeching necessary.
Adnan Akhand, VP, Accounting & Compliance
Adnan has a wide scope of knowledge in accounting and tax compliance. His clients have ranged from startups operating for less than one year to long-established Fortune 500 companies, and everything in between. He is now bringing his expertise to the blockchain industry. He is a Certified Public Accountant with a M.S. in Finance from Northeastern University. Adnan joined BX3, because he believes blockchain technology is the future. He is passionate about helping his clients grow their business through successful initial token offerings (ITOs). In addition to providing accounting and tax compliance services, Adnan has assisted several clients with their search and implementation of new software and technologies to help meet the demands of their growing business.