While cryptocurrency is a little more complicated than the currency we’re used to using, it’s still reportable to the Internal Revenue Service (IRS) for tax purposes. A Cryptocurrency is a digital asset that is traded and secured using cryptography. You don’t need a bank to trade this currency, you can trade it peer to peer on a decentralized control called Blockchain. There are initial coin offerings (ICO) when a new form of cryptocurrency is introduced to the public, much like initial public offerings (IPO) when a company goes public. People trade, buy and sell cryptocurrency just like people do on the stock exchange.
What’s different about cryptocurrency is the technology at the very heart of it. Cryptocurrency is built on blockchain technology, a kind of database where every transaction (or block) is encrypted. It’s a very secure and transparent form of data technology, as we discuss in our previous article, “Blockchain and Accounting.”
As a tax professional, you need to know how to talk to your clients about cryptocurrency. As cryptocurrency becomes more commonplace, taxpayers are using it more frequently. Taxpayers should report and pay taxes on any gains or income they acquire with cryptocurrency. Currently, the IRS treats cryptocurrency as property, which means that cryptocurrency profits are treated as capital gains. (Find more details in our article, “Are You Talking to Clients about Cryptocurrency?”
Let’s start with these top cryptocurrency terms every tax professional should know. Some of these terms and concepts are similar to other financial terms you already know. Others will become more familiar in short order.
Altcoins: Any coins that aren’t Bitcoin. Bitcoin was the first and used to be the only cryptocurrency. While it’s still the most successful, there are many other types of cryptocurrency – with more being introduced on a regular basis.
Anti-Money Laundering (AML): AML regulations meant to detect and stop money laundering by criminal organizations apply to cryptocurrency transactions, too.
Arbitrage: Different exchanges that sell cryptocurrencies may sell them at different rates (not unlike comparing foreign exchange rates at banks and kiosks when you need to change money abroad). Arbitrage is when you buy cryptocurrency from one exchange for a lower price and sell it to another exchange at their higher rate in order to make a profit.
Bear/bull markets: Mean the same as when you use them to describe the stock market; bear market is down, bull market is up.
Exchange: Website where cryptocurrencies are bought and sold.
Fiat: Currency recognized as legal tender by governments, such as the U.S. dollar, Euro, etc.
Limit order/limit buy/limit sell: To set a rule to buy or sell cryptocurrency at a set price.
Liquidity: How easily a cryptocurrency can be bought and sold without affecting the overall price in the market.
Margin trading: A special kind of trading where you risk your existing coings in order to increase the intensity of your trades. Margin trading is considered extremely risky and is recommended only for the most experienced of traders – and even then only on certain exchanges.
Market capitalization (or market cap): Total number of coins in supply times the price; sometimes used to compare where different cryptocurrencies stand.
Mining: The process of verifying transactions in the blockchain (AKA trying to “solve” the next block in the chain). Mining requires a lot of computer power to do successfully (a powerful computer dedicated to verifying blocks is known as a “mining rig”). The person or group that successfully solves for the next block is rewarded with a portion of the cryptocurrency.
Pump and dump: The cycle of an altcoin getting a lot of attention, rising quickly in price, and then crashing.
Shilling/pumping: Advertising your form of cryptocurrency (think: carnival barker)
Tokens: Some people or groups of people will raise money by issuing tokens for currency projects on the ethereum network. For example, Golem (GNT) and Basic Attention Token (BAT).
Wallet: Storage for cryptocurrency; can be a software wallet or a hardware wallet. (Related: “Cold storage” refers to when someone takes their cryptocurrency offline to store it and prevent it from being hacked. They may store it on a USB drive or print a QR code and store it somewhere secure, for example.)
Whale: Someone who owns a very large amount of cryptocurrency.
As you can see, there are a lot of similarities to how more traditional markets work – just the technology for transactions and some of the terms are different.
Finder.com has a great cryptocurrency glossary, if you want to read about even more terms. However, this list will get you started. Now, when your first client comes in and says, “I made some money in altcoins this summer with a combination of mining and some successful arbitrage on my part,” you’ll know what to ask next and what next steps should be.
Want to know more? Stay tuned! In 2019 we’ll be offering special courses and webinars that teach the ins and outs of Crypto Tax thanks to a new partnership with Crypto Tax Academy.