You’ve likely heard of Bitcoin. Maybe even Ripple or Ethereum. But have you paid much attention? No, these are not made-up words, they are forms of Cryptocurrency.
A Cryptocurrency is a digital asset (or currency) that is traded and secured using cryptography. You don’t need a bank to trade this currency, you can trade it peer peer on a decentralized control called Blockchain. Blockchain is basically a public transaction database that functions as a distributed ledger.
You might be asking at this point – with no bank or intermediary institution, how is this secure? Well, everything is verified and secured through “Miners” who work within the network to maintain a master ledger – a blockchain, to verify every transaction.
What is Blockchain?
All of this takes place within a technology called Blockchain. Blockchain is a chain of blocks that exist in a database. Each block contains a digital ledger of transactions (with time stamps) that have been hashed and encoded, and a cryptographic hash of the block that came before it. All of these blocks are linked to each other because they contain an encryption from the prior block. This creates a layer of security that prevents people from altering details about the transaction after it has occurred. If one block is altered, the rest down the line are altered, and the hack is traceable.
Anyone can purchase cryptocurrency using a debit or credit card. You set-up an account, verify your identity (usually with a drivers license), and you’re good to go. Currently, the Cryptocurrency market is experiencing sort of a gold rush because many of the available currencies have been increasing in value rather rapidly. It is quite likely that one or more of your clients have invested in cryptocurrency, which is why you should be sure to ask about it during your tax appointments this season.
How the IRS Views Cryptocurrency
While it has currency in the name, the IRS actually views Cryptocurrency as property – which means there could be capital gains implications. While the IRS hasn’t provided much guidance, as tax pros we all know it’s better to just disclose than to the end up with criminal charges.
So, if you have clients selling, spending, or even exchanging cryptocurrency for other tokens, they will likely have capital gains implications. And, if they were paid in cryptocurrency, they will have to report that as income.
Here’s a rundown of taxable actions with regards to cryptocurrency:
- Trading cryptocurrency: produces capital gains and losses.
- Exchanging cryptocurrency: treated as being sold and is subject to capital gains.
- Receiving payment in cryptocurrency: receipt of payment for goods and services – whether in cryptocurrency or not – is seen as income and must be reported as such.
- Spending cryptocurrency: still a taxable event is and treated as a capital gain or loss.
- Converting a cryptocurrency to a U.S. Dollar: Capital gains
- Mining coins: considered income equal to the fair market value of the coin.
The times they are a changing but the IRS will always want their money. According to MarketWatch, Coinbase, one of the largest cryptocurrency exchanges, will turn over 13,000 users’ data to the IRS within the next 27 days. This year the IRS is making compliance in this area a priority so dot your i’s and cross your t’s tax pros!