Cryptocurrencies went mainstream this year as many stock exchanges began trading these currencies and their derivatives. Exchange Traded Funds popped up overnight as retail investors were allowed easy access to these investments.
Tax accounting for cryptos has always been difficult. The documentation that we receive from many of the trading houses is nothing more than a nightmare.
That being said, the Capital Gains Rules are exactly the same whether you’re trading Bitcoin or Nvidia. But there are intricacies on Crypto Assets that include but are not limited to…
Bitcoin Offshore Asset Reporting
Under almost all circumstances, if you have a Bitcoin or an equivalent account which was valued at any time in 2024 over $10,000, you’ll need to report the account under the offshore reporting requirements of FinCen.
The regulations on FBAR’s have changed. In prior years, The IRS had issued guidance stating that taxpayers with Virtual Currency Accounts / Wallets weren’t required to file an FBAR.
But prior year guidance is for prior years. As such, the laws regarding Virtual Currency reporting have changed as well.
From an IRS Perspective, a Cryptocurrency Wallet is considered the same as a bank account. As such they’re subject to the offshore reporting requirements.
The Service is actively seeking Virtual Currency Wallet owners to tax, audit, and penalize. The IRS has issued subpoenas to some of the larger players in the Bitcoin Realm. The companies fought the subpoenas, but ultimately lost.
Further, the Whistleblower Act provides additional incentives for individuals and organizations to provide information to the government and the Service about offenses, especially if they’re caught themselves. While many individuals believe that having an anonymous account and not reporting it under the FinCen Rules is advantageous, the IRS will presume that you are willful in the non-disclosure, which may cause additional fines and penalties.
Other Virtual Currency Income and Capital Gain Reporting Requirements
Convertible Virtual Currencies are subject to tax by The IRS.
Cryptocurrency used to pay for goods & services is taxed as regular income. You must convert the virtual currency value to US Dollars as of the date of the transaction and keep meticulous records. Wages paid in virtual currency are subject to the same withholding requirements as other wages.
Cryptocurrency held as Capital Assets are taxed in the same manner as any other property. Like stocks or bonds, they’re subject to Capital Gain and Capital Loss Reporting. Virtual Currency Miners must report receipt of the virtual currency as regular income.
Treatment of Significant Decline In Value of Cryptocurrency
Virtual Currency markets had declined significantly in the past couple of years with the collapse of many market makers including FTX. In response, the IRS advised taxpayers that they couldn’t take a loss deduction for the decline in value of a digital asset’s market value if they did not dispose of it or attempt to abandon it.
While some could argue that a cryptocurrency whose value has dropped to a fraction of a penny is worthless, the IRS took a different position. As long as that individual cryptocurrency was traded on at least one exchange, the possibility existed that its value could increase in the future.
As such, it’s not considered worthless.
Legal Fees May Not Be Deductible
If you were the victim of a Cryptocurrency Scam and hired an attorney to recover your assets, the legal fees may not be deductible.
The only places we can deduct legal expenses are on business returns. Whether it’s a corporation, partnership, or proprietorship, we are allowed to deduct professional fees.
But the portion of the Personal Income Tax Return where legal fees can be deducted was purposefully eliminated in the Tax Cuts and Jobs Act of 2017. This has created one of the most egregious anomalies in the current tax code system.
If you receive a judgement for let’s say $1M as a result of one of these cases, and are required to pay one-third of the judgement in legal fees, there is nowhere for us to deduct those fees. You will be required to pay tax on $1M.
I realize how unfair and unreasonable this is. But until the laws are changed, there is nothing that we can do.
Reporting Digital Asset Activity
Digital asset activities must be disclosed on most tax forms including business, personal, estate, and trust returns. Non-disclosure of this activity exposes taxpayers to penalties.
Let me leave you with this…
Congress recently passed a rule which was reaffirmed by the Service stating that all Virtual Currency Exchanges and Trading Houses must provide proper documentation to taxpayers so that they’re able to properly file their income tax returns. In my experience, this is not always the case.
I’ve received documentation on these transactions that’s completely indecipherable. This makes the process of completing an auditable income tax return almost impossible.
Let’s also realize that this same indecipherable documentation is being provided to the Internal Revenue Service. If I can’t understand it, given my IQ which is well above 100 and my 35 years of experience in this business, what do you think will happen when an IRS Agent sees it?
Please understand the matching principle we have in Income Tax Preparation. The returns we complete are matched against what the IRS already has on file under our Social Security Numbers or EINs for company returns.
If it doesn’t match we will usually get either a change letter or will need to go through a full audit. That could easily be because the IRS Agent just doesn’t understand the bad documentation provided by the trading house.
It’s not our job to keep meticulous records on your trading activities. It’s yours. Take the time to properly note the day of the trade, the number of shares, the exact price in US Dollars, and any resulting expenses on the trade.
This is required on all purchase and sales activity. If you’re using a margin account to borrow the money necessary for these trades, then documenting the interest costs and other resulting fees is also a necessity.
Please, for the sake of whatever you consider to be holy, don’t expect your Trading House to be responsible in providing this information. Half do. The other half don’t.
Your personal documentation could be what will save you from substantial additional taxes, interest, and penalties.
Please also understand that when dealing with the Taxation Agencies, you’re guilty until proven innocent. They aren’t going to come in assuming that your clean.
Their job is to collect money. They’re also supposed to properly enforce the law, but many of the agents we deal with don’t know the tax laws they’re trying to enforce.
The one book I always have when doing an audit is the Federal Tax Guide from that particular year. Many times I’ll need to reference it, when an agent doesn’t know or understand the laws themselves.
If we don’t have the documentation necessary to prove that you’re innocent, there isn’t going to be much if anything that we can do to stop a nightmare. Please keep proper records on these transactions.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
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