tax compliance for bitcoin and virtual currencies
TRANSCRIPT
John WandriscoShaun Hunley
Tax compliance for Bitcoin and virtual currencies
REUTERS / Firstname Lastname
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Tax compliance for Bitcoin and virtual currencies
Global uncertainty over the last year has made cryptocurrencies like Bitcoin and Dogecoin skyrocket in popularity and value. These new virtual mediums present alternative methods to buying and saving, but how does it impact taxes? The IRS estimates 18–21 million taxpayers will need to consider crypto when filing their return, and firms need to be armed with the knowledge and tools to navigate the new world of crypto-compliance. Join Thomson Reuters’ Shaun Hunley and Ledgible’s John Wandrisco for an expert discussion on navigating the compliance complexities of cryptocurrency.
Our cryptocurrency experts will provide you with insight into the world of virtual currencies, so you can better serve your clients. From the very first days of Bitcoin in 2008 to the present reality of the bull/bear market cycles, they will discuss the tax consequences of cryptocurrency, and give you answers on specific issues, like the dreaded virtual currency question on the 1040 form and how to avoid the crypto digital shoe box.
Tax compliance for Bitcoin and virtual currencies
Tax compliance for Bitcoin and virtual currencies3
Crypto 101• Virtual currency milestones• Other virtual currencies• Exchange vs. wallets
Why crypto?• Growth/adoption• IRS enforcement• Advisory/growth opportunity
Tax consequences and compliance for crypto
Agenda
Tax compliance for Bitcoin and virtual currencies4
Crypto 101
Tax compliance for Bitcoin and virtual currencies5
Virtual currency milestones
2009Bitcoin created
March 2014
IRS Notice 2014-21
November 2016
John Doe summons
July 2019IRS letters
October 2019
Rev. Rul. 2019-24
August 2020
New round of IRS letters
March 2021IRS
announces “Operation
Hidden Treasure”
April 2021Coinbase
goes public
Tax compliance for Bitcoin and virtual currencies6
• Ethereum (ETH)• Litecoin (LTC)• Zcash (ZEC)• Dash (DASH)• Ripple (XRP)• Monero (XMR)• Bitcoin Cash (BCH)• NEO (NEO)• Cardano (ADA)• EOS (EOS)• Dogecoin (DOGE)
Other virtual currencies
Over 4,600 virtual currencies tracked on CoinMarketCap.com as of mid April 2021
Tax compliance for Bitcoin and virtual currencies7
A service/platform that enables clients to trade cryptocurrencies for other resources, such as other cryptocurrencies, or US Dollars
Exchange
Exchanges use custodial accounts to hold their user’s funds and then track it on an internal ledger to allow for trading and exchanging funds
All these trades are made off-chain and no actual crypto is transferred as a result of these trades
Only movement in the ledger changes
Tax compliance for Bitcoin and virtual currencies8
A device, application or a service which stores and encrypts the public and/or private keys and can be used to track ownership, receive or spend cryptocurrencies
Wallet
Wallets don’t store the cryptocurrencyWallets store the Private Key used to sign transactionsAll transactions are written into the blockchain
Hot Wallet• Connected to the
internet
• More user-friendly
• Less secure
• Small day-to-day transactions
Cold Wallet• Not connected to the
internet
• Harder to use
• More secure
• Long term holding
Tax compliance for Bitcoin and virtual currencies9
Why crypto?
Tax compliance for Bitcoin and virtual currencies10
Growth/adoptionBitcoin vs Dow Jones Industrials
April 2016-April 2021
14,770.62%
88.55%
Tax compliance for Bitcoin and virtual currencies11
Growth/adoption
Tax compliance for Bitcoin and virtual currencies12
Why the IRS is worried about Bitcoin• Historically, transactions have been anonymous, which may lead to the underreporting of
income• Association with illegal activity• Many taxpayers don’t understand the tax implications
IRS enforcement
Tax compliance for Bitcoin and virtual currencies13
• Educational in nature (“may not know the requirements”)• Provides guidance on reporting virtual currency transactions and invites the taxpayer to
file amended returns– Taxpayer should write “Letter 6174” at the top of the first page– Mail to Pennsylvania address
• Taxpayer doesn’t need to reply to the letter
Letter 6174
Tax compliance for Bitcoin and virtual currencies14
• Educational in nature (“may not have properly reported your transactions”)• Provides guidance on reporting virtual currency transactions and invites the taxpayer to
file amended returns– Taxpayer should write “Letter 6174-A” at the top of the first page– Mail to Pennsylvania address
• Taxpayer doesn’t need to reply to the letter; however, the IRS may send other correspondence about potential enforcement activity in the future
Letter 6174-A
Tax compliance for Bitcoin and virtual currencies15
• For one or more of tax years 2013 through 2017, IRS hasn’t received either a federal income tax return or an applicable form or schedule reporting virtual currency transactions
• Taxpayer must take action– File delinquent returns and report virtual currency transactions (write “Letter 6173” at the top of
the first page)– If a mistake was made, file amended returns (write “Letter 6173” at the top of the first page)– If everything was reported correctly, mail (or eFax) response to the IRS
• Letter has a response date– Can request a 30-day extension– If no response, IRS may refer tax account for examination
Letter 6173
Tax compliance for Bitcoin and virtual currencies16
• Investors’ reporting doesn’t match other records in the IRS’s possession– Taxpayers will either agree or disagree with the notice– If taxpayer agrees, there’s generally no need to amend the return
CP2000 notices
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• The IRS has teamed up with Australia, Canada, the Netherlands, and the United Kingdom to investigate virtual currency crimes, including fraud and money laundering
• Countries will share information and conduct joint investigations
The J5
Tax compliance for Bitcoin and virtual currencies18
Announced in March 2021 and the Federal Bar Association Virtual Tax Conference• Cryptocurrency fraud is a top IRS Priority• A joint effort between the IRS’ civil office of fraud enforcement and its criminal
investigation unit, will train agents to look at blockchains to root out tax evasion among cryptocurrency users.
Operation Hidden Treasure
Tax compliance for Bitcoin and virtual currencies19
• Gain/Loss Harvesting
• Gift/Estate
• Tactical• Strategic
• Financial Statement
• Tax
• Bookkeeping• Tax
Compliance Audit Support
PlanningAdvisory
Advisory/growth opportunity
Tax compliance for Bitcoin and virtual currencies20
Tax consequences and compliance for crypto
Tax compliance for Bitcoin and virtual currencies21
Apply general tax principles• Gain or loss recognized every time• Must track tax basis• Can be classified as business property (mining), investment property, or personal
property
Virtual currency is property (Notice 2014-21)
Tax compliance for Bitcoin and virtual currencies22
• FMV (in USD) as of date of receipt included in gross income• Net earnings subject to self-employment tax
– Must constitute a trade or business– Mining not undertaken as an employee
Mining
Tax compliance for Bitcoin and virtual currencies23
• FMV (in USD) must be included in income– Consult the applicable exchange– Basis is FMV as of date of receipt
• If later exchanged for other property, gain or loss will be recognized
Receiving virtual currency as payment for goods or services
Tax compliance for Bitcoin and virtual currencies24
You digitally accept 10 Bitcoins as payment for services. On the date of receipt, Bitcoins are worth $1,000 each, as listed by Coinbase. Therefore, you recognize $10,000 ($1,000 × 10) of business income. A month later, when Bitcoins are trading for $1,500 on the Coinbase exchange, you use two Bitcoins to purchase supplies for your business. At that time, you will recognize $3,000 ($1,500 × 2) in business expense and $1,000 [($1,500 − $1,000) × 2] of gain due to the Bitcoin exchange. Since you are not in the trade or business of selling Bitcoins, the $1,000 gain is capital in nature.
Example
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Tax compliance for Bitcoin and virtual currencies28
• Gain or loss equals the difference between the amount received in the exchange and the adjusted basis in the virtual currency
• If held for investment purposes for more than one year, gain subject to preferential long-term capital gain rates when sold or exchanged (20% maximum rate)– Otherwise, short-term capital gain (37% maximum rate)
• Form 8949 used to figure capital gain or loss• Reported on Schedule D
Virtual currency as investment property
Tax compliance for Bitcoin and virtual currencies29
Hard fork• Cryptocurrency undergoes a protocol change resulting in a permanent diversion from the
legacy (or existing) distributed ledger• Typically results in the creation of a new cryptocurrency on a new distributed ledgerAirdrop• Mechanism used to disperse cryptocurrency units to multiple taxpayers’ distributed ledger
addressesTax consequences• Taxpayer doesn’t have gross income under IRC Sec. 61 as a result of a hard fork if he or
she doesn’t receive units of a new cryptocurrency• Taxpayer recognizes ordinary income as a result of an airdrop following a hard fork if he
or she receives units of new cryptocurrency
Hard forks and airdrops (Rev. Rul. 2019-24)
Tax compliance for Bitcoin and virtual currencies30
Reporting
Tax compliance for Bitcoin and virtual currencies31
Checking “Yes”• The receipt or transfer of virtual currency for free (including from an airdrop or hard fork)• An exchange of virtual currency for goods or services• A sale of virtual currency• An exchange of virtual currency for other property (including for another virtual currency)• A disposition of a financial interest in virtual currency
Checking “No”• Merely holding virtual currency in a wallet or account• Transferring virtual currency from one wallet or account you own or control to another that
you own or control
Reporting
Ledgible Crypto Tax
Making the“insanely complex”
as easy as 1-2-3…
1. Connect your Exchange Accounts and wallets
2. Review the Transactions
3. Import Results into tax software or provide to your tax preparer
Ledgible Crypto Tax
Transaction Matching
Our industry exclusive capability allows you to automatically trace when holdings move between crypto wallets and exchanges and track the cost basis the ensure client’s returns are accurate.
Complete Fee Accounting
Our leading capability to account for fees allows full wallet/exchange cost basis calculation to minimize taxes owed – clearly showing your firms value and expertise to your clients.
Robust Exchange and Wallet Integrations
Directly integrates with major exchanges and on-chain wallets ensuring data is accurate and up-to-date.
Ledgible Crypto Tax
Tax Planning
1. Unrealized Gain/Loss tracking
2. By currency short/long term breakout
3. Estimates, extensions and year-end
Ledgible Crypto Tax
The Crypto Tax Platform Trusted by Professionals
Used by Accounting Firms and Tax Preparers around the world
Passed extensive third-party security reviews
SOC Audited – Required for third-parties providing tools to accounting firms
Ledgible/Thomson Reuters automation flow
Taxp
ayer
Firm Send
Organizer
Complete Organizer
Generate Reports
Review Crypto Data
Enter Crypto Data
Import toUltraTax
Import toGoSystem
Crypto tax flow
Import toReturn
Generate Reports
Review Crypto Data
Enter Crypto Data
• Income?
• Gifts?
• Incorrect basis?
• Missing transactions?
• Form 8949
• Tax software import
• Income
• Gifts
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Questions
46 Tax compliance for Bitcoin and virtual currencies