As cryptocurrencies like Bitcoin have taken the world by storm, investors from all across the globe have been dying to get in on the action, and have been throwing their full financial weights behind these intriguing, next-generation currencies. Despite the massive uptick in interest surrounding popular cryptocurrencies lately, however, many investors and tax pros alike who are employed by crypto-holding clients are unfamiliar with many of the key tax considerations that they need to be keeping in mind, and are stumbling blindly towards a future where they could face serious repercussions for their ignorance.
Here’s everything you need to know about the key tax considerations surrounding today’s most popular cryptocurrencies, and how you can avoid getting yourself into trouble by avoiding common mistakes.
The basics behind cryptocurrencies
While popular digital currencies like Bitcoin and Ethereum have continuously seized global headlines thanks to their sudden plunges in valuation, which are inevitably followed by rapid gains that see them regaining much of their lost value, most market analyst who have been keeping their eyes on these fledgling currencies have no idea how they work, or what tax implications they carry with them. Luckily, a series of official resources exist to help you make sense of the tax considerations you need to keep in mind when eying a bitcoin purchase, and you can learn to separate the signal from the noise by relying only on authoritative sources of information who won’t mislead you.
The Internal Revenue Service, for instance, has recently issued virtual currency guidance to help investors and concerned citizens around the globe make sense of what taxes they may owe when it comes to owning today’s most popular crypto-tokens. Contrary to many of the rumors that are swirling around cryptocurrency-focused internet forums, these virtual currencies are indeed considered taxable income, and virtually all general property transaction rules apply to them.
Companies who are considering paying their employees in cryptocurrencies, for instance, need to understand that using Bitcoin or any other popular crypto-token to issue wages is still very much taxable, meaning you can’t expand your operations without having to worry about taxes. Criminals around the world are using popular cryptocurrencies to launder money, so investors hoping to get in on the crypto-buzz should also understand that there’s going to be significantly more scrutiny on crypto-transactions in the near future. With global criminal enterprises and even rogue nation states like North Korea relying on cryptocurrencies to skirt financial regulations, investors should understand that the impending crackdown may seriously inhibit their ability to make a profit in the future with these virtual tokens.
Accounting firms which are hoping to get in on the crypto-craze should caution themselves, too; while more regulation is doubtlessly coming, particularly as central banks around the world mull over how they can regulate these virtual currencies, the existing dearth of regulations makes these virtual tokens extraordinarily speculative, meaning massive profits gain be gained – and more importantly, lost – overnight. Keep that in mind when discussing the basics of these currencies and how to create an LLC for tax purposest with your clients.
Don’t forget about your reporting obligations
Far too often, accountants and investors alike who are just getting into cryptocurrencies for the first time fail to understand that there are reporting obligations they have to follow with these investments, just like any other major transaction. If you feel like the IRS didn’t go in-depth enough to sate your demand for tax-related information surrounding these fledgling virtual currencies, consider visiting the sites where they’re traded, as they’re often brimming with tax-related information to make it easier for investors to buy and sell their favorite tokens.
Buying and selling isn’t the only thing you need to consider, either; mining cryptocurrencies, which is going out of style thanks to the exuberant cost but still fairly popular on the web today, is also subject to tax regulations. If your firm is thinking about representing a client with a generous crypto-mining operation, consider the tax implications of getting involved with such a speculative asset beforehand, and you may save yourself from some serious financial heartburn in the future.
Above all else, don’t trust baseless rumors you hear floating around the internet, which compose a great deal of the information out there about modern cryptocurrencies, but instead rely on authoritative sources like the coin exchanges which facilitate crypto-transactions and central authorities like the IRS which will come to govern them more and more in the future. A failure to pay the proper dues on your crypto-transactions could land you in serious legal jeopardy, and accountants and investors should understand that despite the lack of regulations surrounding these virtual currencies today, tomorrow’s market will be an entirely different ballgame, complete with stricter rules and harsher fines for those who break them.
Gary Eastwood is a CPA licensed senior accountant from Seattle, Washington. He received his CPA license from the Washington State Board of Accountancy in 2001 before relocating to Onawa, Iowa in 2008. Over more than 15 years of accounting experience, Gary has worked with multinational health service providers and independent CPA firms. He has a proven ability in dealing with business clients from a variety of backgrounds as well as leading companies to greater efficiency and profitability. He is familiar with both US GAAP and China GAAP.