by Anne Szustek Talbot, VP of content, BX3 Capital
Cryptocurrency investors across the US got a jolt from the usual lethargy of the dog days of summer this past week when they opened their mailboxes. The IRS sent out some 10,000 gentle reminders to individuals identified as having at least one cryptocurrency account from 2013 to through 2017 that “virtual currency is considered property for federal income tax purposes.”
According to cryptocurrency trade publication The Block, the IRS sent three versions of the letter: Versions 6174 and 6174-A are only educational letters meant to inform about cryptocurrency-related tax obligations, with no further action needed. Anyone who received version 6173 of the IRS cryptocurrency tax letter, however, needs to take the IRS’s heed and add compliance to their summer to-do list.
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As a firm that helps guide companies on matters related to tax and cryptocurrency, we at BX3 Capital have more than a few tips on how individuals should file for taxes on cryptocurrency. Adnan Akhand, our vice president of accounting and compliance, put together this general guideline on how to navigate crypto and the IRS:
1. Keep detailed records. While this is a must in accounting in general, given the random and arcane series of alphanumeric characters that often are the identification tags for crypto wallets, recordkeeping is of the utmost importance.
2. Have at least a basic understanding of the tax requirements for your situation. In most cases, businesses need to file 1099s for any contractor or vendor paid more than $600 during the fiscal year.
3. The IRS’ designation of virtual currency as property means that nearly crypto transaction is a taxable event. Have no fear, however: IRS Form 8949 allows for easy reporting of capital gains and losses. For cryptocurrency, we recommend the FIFO (First In, First Out) accounting method. It’s considered the most conservative approach — and that is, least likely to raise flags among the IRS.
4. Don’t forget your Airdrops. An airdrop might seem like a garden-variety cash gift. But they’re not. There are a lot of federal tax exemptions available for cash gifts. Airdrops are taxable in full at the time of sale — and since their purchase price is zero, the entire price at the sale is taxed as capital gains.
Given that cryptocurrency has been around in some form for more than a decade, it would stand to reason that the US would have more regulations in place. The US blockchain and cryptocurrency sector might be among the few — if not the only — industry whose rallying salvo is “more regulation!” A clear framework would give US-based cryptocurrency and blockchain companies a roadmap for innovation, lest firms make an unwitting misstep and run afoul of authorities — or in what is a worse scenario for American economic innovation, fleeing overseas to crypto-friendlier jurisdictions.
Draft Congressional bills such as the Token Taxonomy Act, if passed, would go a long way in instituting some ground rules for how cryptocurrency should be incorporated into the overall US economy, including how it should be taxed. Congress should resume debate and research into the bill after its August recess. In the meantime, sticking to dutiful recordkeeping and a capital gains tax-treatment approach stand to provide some relief to any crypto investors feeling a bit of extra heat this summer.