Mind Your Ledger: Tax Preparation for Cryptocurrency Owners

Over the past several years, cryptocurrency — also known as virtual currency — has gone from a fringe investing strategy and questionably nefarious trading method to a more credible and increasingly accepted form of payment. According to NBC News, roughly 21 percent of adults have owned cryptocurrencies in recent years, such as Bitcoin, Ethereum, Tether, and many others. This statistic is incredibly astounding when we realize cryptocurrency has existed for only 15 years.

Crypto is not a flash-in-the-pan fad: even large, blue-chip companies such as AT&T accept this type of payment. As crypto’s popularity blooms, so will the tax requirements. Currently, the process of reporting crypto gains and losses is fairly straightforward. A little preparation can help cryptocurrency holders and CPAs quickly and easily file gains and losses — but before we go into those details, let’s take a quick look at how cryptocurrency has changed the financial landscape.

A Brief Explanation of Cryptocurrency

Conventional currency, such as the US dollar, is issued and backed by a country. Cryptocurrency is unlike conventional currency because a government does not back it; instead, anyone can create cryptocurrency “coins” through a process called “mining.” During mining, a computer solves very complex math problems. If solved properly, a new coin is created and validated via a public digital ledger called a blockchain.

Blockchain ensures users can trace coins back to the moment of their origin; each coin contains a record of every time it has been exchanged. One coin may be worth hundreds of thousands of dollars. Coin holders may exchange part, or all, of a coin for goods and services.

Cryptocurrency holders “store” their coins in virtual wallets. These wallets don’t hold cryptocurrency (the coins exist forever on the blockchain) but allow access through private “keys” or passwords.

Understanding Cryptocurrency’s Tax Implications

Cryptocurrency is currently taxed as a security, just like a piece of stock, and must be reported to the IRS on Form 8949 — the same form one would use to report short- or long-term capital gains. There are a few caveats, however.

Individual cryptocurrency owners: Every cryptocurrency transaction must be reported to the IRS. Each coin, or fraction of a coin, can be bought and sold hundreds or thousands of times throughout the year. Cryptocurrency holders can ease the burden of reporting transactions using software such as BitcoinTaxes, CoinLedger, CoinTracking, Koinly, or CoinPanda, which can help you complete a virtual currency tax report.

Businesses: Businesses that accept cryptocurrency have two reporting responsibilities: They must report the cost of the goods sold by the business and the profit or loss when the cryptocurrency is eventually exchanged into conventional currency. Again, these profits and losses must be recorded on Form 8949. As of 2023, if a business does more than $10,000 in cryptocurrency transactions, they must be reported on IRS Form 8300.

Charitable contributions: People who make charitable contributions using cryptocurrency must receive a signed statement from the charity if the donation was more than $250 confirming that no goods or services were given in exchange for the donation. If the donation is more than $5,000, additional signed documentation is required.

Preparing for Tax Season

Your accountant or CPA will need several pieces of information when compiling tax documents for cryptocurrency holders. To determine whether it’s necessary to report cryptocurrency on income taxes, answer the following question: At any time during 2022, did you receive (as a reward, award, or payment for property or services), sell, exchange, gift or otherwise dispose of a digital asset or a financial interest in a digital asset?

If the answer is “yes,” your accountant or CPA will need additional information to properly calculate your taxes. Use this checklist to prepare the information.

__ A list of accounts that have any cryptocurrency transactions. Such transactions may include trades, transfers, withdrawals, deposits, or airdrops completed through crypto exchanges, over-the-counter (OTC) desks, crypto wallets, or any other transfers or activities.

__ A list of digital asset transactions. Cryptocurrency platforms must report digital asset transactions to both the IRS and the cryptocurrency holder. A CPA will need a copy of those transactions.

__ A summary of cryptocurrency transactions. Use software to compile a list to reconcile with the transactions provided by the cryptocurrency platform. This will be filed electronically along with the tax return. These transactions may include deposits, withdrawals, trades, staking income, deposits due to forks, any other income or expense-related deposits or withdrawals, mining income, airdrops, or initial coin offering (ICO) contributions.

__ A list of any business cryptocurrency transactions over $10,000. Any business that accepts more than $10,000 in cryptocurrency will need to file a special form.

Although cryptocurrency is still in its infancy and the world has yet to fully explore its impacts and possibilities, reporting requirements are expected to evolve and become more complex in the future. That said, we continue to stay on top of rules and regulations relating to cryptocurrency tax reporting requirements.

Get in touch

We are always happy to assist clients with questions or concerns about cryptocurrency. Schedule an appointment or call us at 209-527-4220 to discuss your digital asset holdings.