Even though the tax calendar and deadlines have been extended past the initial 4/15 deadline, that does not mean that the crypto tax compliance issues will be any less important for the 2019 filing. In fact, the extension of tax deadlines might actually make being aware of what to look out for even more important; even though the gains and losses will not change the rules, but expectations around how to report and disclose this information just might.
There has been a lot written about crypto taxation, so rather than present this as a definitive listing of issues, this should form the basis for more comprehensive conversations between practitioners, colleagues and clients.
These considerations may seem like enough to worry about as is, but these items listed below do not even touch on the issues related to stablecoins. Developed as alternatives to cryptocurrencies, which were created as alternatives to fiat (government-issued) currencies, many see stablecoins as a halfway point between fiat and decentralized cryptocurrencies. Since stablecoins are stabilized or otherwise pegged to an external asset, changes in the underlying value of these assets may cause additional tax complications. That will be the topic of a forthcoming piece, but for the time being, let’s focus on some of the primary considerations tax practitioners need to factor into any conversation with clients about crypto taxation.
Let’s dive in! Here’s what you need to know:
- Reporting and disclosure are more important than ever. The IRS, via its inclusion of a questions directly asking taxpayers if the latter had any cryptocurrency transactions, clearly has made collecting information and tax revenues linked to cryptoassets a priority. Disclosing income is always important, but the vigor with which the IRS seems to want cryptoasset and blockchain information makes full reporting and disclosure the first compliance angle every practitioner need to focus on.
- Clients need to understand what exactly the correct accounting treatment is for cryptoasset transactions, gains and losses. A lot of bad information has been floated in the marketplace, including an (only recently debunked) idea that crypto-to-crypto exchanges could qualify for Section 1031 treatment. A good rule of thumb is to assume that any time a cryptoasset changes hand that will generate a taxable event and associated tax liability. As the crypto space continues to evolve, there will invariably be other pieces of misinformation that enter the marketplace. Accuracy remains something practitioners need to focus on.
- Some taxpayers are not going to have a complete set of records and transactions, which can complicate things for practitioners seeking to provide advice and insights. Even though the responsibility of maintaining a full set of books and records remains with the client, there may be instances – especially with extended tax filing deadline amid the COVID-19 disruption – when records simply do not exist. In these cases, if reconstructing the transactions and records is simply not possible, practitioners need to use professional judgement when advising clients.
- Much has been written about the decentralized and distributed nature of bitcoin and other cryptocurrencies, but many retail investors and small to medium size businesses that accept cryptoasset for payment may store holdings on exchanges. If these exchanges are compromised, and even if the crypto holdings themselves are not stolen, transactional history and records may be stolen or negatively impaired. Establishing an appropriate back-up and record-keeping policy can help mitigate this risk.
- Finally, there’s a lingering association with having done something wrong. Even though crypto has moved, definitively, into the mainstream financial conversation, there may be some lingering hesitation of some taxpayers to disclose information. This can take the form of being hesitant to report all crypto transactions or being unsure of how to correct potential past errors. In either case, practitioners should – as with any other tax obligation – encourage clients to report all taxable income and make every effort to ensure any past omissions are addressed.
Crypto tax compliance and reporting considerations are certainly items that any practitioner seeking to advise clients or provide guidance to current or potential clients needs to remain aware of going forward. As different types of cryptoassets, ranging from well-known cryptocurrencies, such as bitcoin, to more recently developed stablecoins, enter the marketplace, the potential tax implications and complications will only increase. Remaining vigilant and as up to date as possible with these fast-moving changes is a responsibility and opportunity for all practitioners, especially amid the disruption and uncertainty caused by COVID-19. Crypto has move to the mainstream and practitioners remain well positioned to advise, now and moving forward.