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Introduction

Individuals and businesses around the world deal in cryptocurrencies for investment, business, or pleasure. Whatever the reason, many of these crypto transactions are taxable events. This includes crypto-to-crypto exchanges, income from mining and yield farming, staking, receiving new tokens or airdrops, and income from other De-Fi activities. This also includes any appreciation in value when selling or disposing of your cryptos. Failure to report your income or gains from such transactions or falsely reporting crypto transactions could result in an investigation by the Internal Revenue Service (IRS).

To protect themselves, many individuals and businesses seek the services of a crypto-certified public accountant (CPA). That said, CPA experience in the crypto industry is sorely lacking due to the newness of this field. Therefore, it is essential to do your due diligence before hiring a crypto CPA, whether your crypto CPA prepares your business taxes or acts as your authorized representative before the IRS. This article outlines the most important factors to consider before hiring a crypto CPA.

10 points of consideration

In 2014, the Internal Revenue Service (“IRS”) issued the first cryptocurrency guidance concluding that crypto transactions are taxable events and should be treated as “property” for federal income tax purposes. revenue. Over the years, the IRS has been both encouraging and then aggressive in reminding individuals to report and pay taxes on their crypto transactions. Starting with the 2019 tax year, the IRS has added a new question on Form 1040 that specifically asks taxpayers whether they have received, sold, sent, traded, or otherwise acquired a financial interest in cryptocurrency. or a “virtual currency”. The coming tax years have been both confusing and confusing for taxpayers. Individuals are unsure how the IRS will respond to their interpretation of the tax code regarding their crypto transactions. Therefore, CPAs with knowledge of cryptocurrencies are in high demand. Below are ten things to consider before hiring a crypto CPA:

  1. Ask your crypto CPA how the IRS currently treats cryptocurrencies for tax purposes.

Since 2014, the Internal Revenue Service (IRS) has made it clear that it treats transactions in cryptocurrencies – or “virtual currencies” – as property. This means that the receipt or purchase and the sale or disposition are taxed in the same way as a car or a house would be. Cryptos are not a currency. Your crypto CPA should explain this and the consequences to you.

  1. Understand and embrace the approach that every cryptocurrency transaction can be considered a taxable event and ask your crypto CPA to give you a general overview of cryptocurrency taxation.

Selling virtual currencies or cryptos is not the only time crypto transactions are taxed. Whenever your cryptos are transferred out of your wallet, exchanged for fiat or other cryptocurrencies or otherwise changes in wallets are all examples of taxable events. Improper recording and tracking of these FMVs on the date of purchase, sale and disposition could be devastating.

  1. Make sure you know how to calculate your tax base and how your CPA uses this base to record crypto transactions.

Your cost basis in your crypto is the amount you spent to purchase the crypto, including fees. Over time, your adjusted base increases due to expenses and decreases due to credits and deductions. When you sell your crypto, your gain or loss is calculated by subtracting your adjusted basis from the FMV at the time of the sale. IRS Publication 551, Basis of Assets, provides more information.

  1. Opinions of federal agencies on cryptocurrencies are inconsistent and uncertain. Crypto CPAs need to embrace this, keep abreast of legislative changes, and guide their clients accordingly.

The IRS and SEC are the two main federal agencies that issue advice and interpretations on cryptocurrencies. When it comes to blockchain technology and cryptocurrencies, the SEC’s view focuses on investors, investment advisers, broker-dealers, capital markets and exchanges, and transfer agents. The IRS tends to focus on the use of cryptocurrencies as a medium of exchange, unit of account, and store of value, as well as the various tax reporting and disclosure requirements for crypto transactions. Crypto CPAs should be familiar with the current approaches, interpretations, and enforcement processes of these two federal agencies.

  1. Learn about the difference between crypto transactions that are typically ordinary income and crypto transactions that receive capital treatment. Make sure your crypto CPA can transmit this information.

Generally, anything mined, staked, earned through free token giveaways, airdrops, or Initial Coin Offering (ICO) products is ordinary income. Once you hold one of these and then sell or otherwise dispose of them, the crypto transaction now receives capital treatment, which will be either a capital gain/loss long-term or short-term, depending on how long you’ve held them. .

  1. Ask how, when, and under what circumstances you should recognize a gain or loss when selling your cryptocurrency for real currency.

When a taxpayer sells crypto, they must account for capital gains and losses on the sale, subject to capital loss deduction limits. This amount, as your crypto CPA should be able to explain, will be the difference between your adjusted base in the crypto and the amount you received in exchange for the virtual currency. IRS Publication 544, Sales and Other Dispositions of Assets provides more information on this topic.

  1. Learn about the cryptocurrency software your crypto CPA uses, including how they reconcile gains and losses for their clients.

Cryptocurrencies and blockchain applications are new technologies that not all investors, federal agencies, and CPAs have fully mastered. A good CPA will approach these new technological applications with specialized software suitable for tracking cryptocurrencies. If your crypto CPA says it reconciles crypto transactions by hand, consider that a red flag. Tracking FMVs across multiple exchanges for many cryptocurrencies is virtually impossible without specialized technology software.

  1. Crypto transactions could open the door to various additional reporting and disclosure obligations under federal law.

Some cryptocurrencies will meet the SEC’s definition of “security” and will therefore need to be registered or exempt. Additionally, if you host an online platform that sells cryptocurrencies that are considered “securities,” the SEC may want your platform to be registered as an “exchange” and the people operating and managing the Platform are registered as “broker-dealers” or “investment advisers”, in certain circumstances, under the federal securities laws and the Investment Advisers Act.

  1. Depending on what you or your business does with cryptocurrencies, additional obligations may be required beyond IRS tax reporting and SEC registration. Your crypto CPA should pass this on to you in detail.

If your business involves certain cryptographic transmission services undertaken on behalf of buyers and sellers, you may need to apply for a money transfer license under the Bank Secrecy Act and FinCEN rules. However, if you are simply using your cryptos to grow your business or pay employees, this requirement may not apply. Finally, if you hold crypto in a foreign exchange account, you may need to file an FBAR report on FinCEN Form 114, Foreign Bank and Financial Account Report.

  1. Ask and make sure you understand, and your crypto CPA can explain how federal agencies like the SEC and IRS go after individuals and businesses that engage in crypto transactions.

There is no uniform or comprehensive cryptocurrency legislation. Instead, federal agencies use already existing laws to regulate and investigate crypto transactions as well as for their enforcement efforts. Notably, the SEC released a framework that helps it and individuals understand how and when registration applies to coins, tokens, and other virtual assets.

“The IRS considers crypto income to be grossly underreported or misreported by U.S. taxpayers. As a result, he reacted by increasing his investigations for tax evasion and false declaration of income. Taxpayers who fail to file or falsely file tax returns are subject to fines and criminal penalties. In addition to the IRS, the IRS often works in conjunction with other federal agencies such as the SEC or the DOJ and the FBI when the taxpayer has engaged in criminal conduct. If you need help with your taxes or need a representative to act on your behalf before the IRS, it is important to do your due diligence when selecting a crypto CPA. – Dr. Nick Oberheiden, founding lawyer of Oberheiden PC

Conclusion

Hiring a crypto-certified public accountant (CPA) is a big deal – whether you need tax preparation services involving complex crypto transactions or have been flagged by the IRS for review and you need a CPA experienced in crypto transactions to act as your authorized representative. Your crypto CPA should know the tax laws and should be able to explain the IRS’ basic strategy and approach to cryptocurrencies, as well as advise you on which crypto transactions trigger the tax liability. Individuals and businesses undertaking various cryptocurrency transactions should think carefully about the crypto CPA they maintain, such as considering the ten tips in this article.

Oberheiden PC © 2022 National Law Review, Volume XII, Number 104