The whole idea behind cryptocurrency was to create a peer-to-peer currency that’s independent of any government or banking system. But, as the inevitable appearance of the grim reaper, Uncle Sam is naturally getting his cut.
Cryptocurrency has been around since 2009, when the debut of Bitcoin prompted head-scratching among the uninitiated over just what digital currency is and how it works. As numerous cryptocurrencies have since come into use, how crypto should be taxed has been—and remains—a work in progress by the IRS. Of course, this hasn’t stopped it from taxing crypto while they figure it out.
In 2014, five years after Bitcoin was launched, the IRS finally issued what it referred to as “preliminary guidance” for cryptocurrency taxation with Notice 2014-21, (the “Notice”). Presented in FAQ format, the notice contains 16 questions and answers focused mainly on transactions. Perhaps the most significant takeaway is that IRS was not classifying cryptocurrency as currency, but as property, though the agency persists in referring to them as “virtual currencies.” This classification left many questions unanswered and created potentially complicated and daunting reporting requirements.
At the outset, clients (dilettantes, rather than hard-core coiners) want to know what is reportable and how to go about calculating potential tax liability. As with most tax questions, the best answers should include qualifications. With the caveat that accountants can bring more clarity, there are some general rules of thumb that advisors can offer concerning what events are potentially taxable. These include:
• Selling cryptocurrency for regular currency.
• Trading one form of crypto for another.
• Using it to buy a good or service.
• Being paid with it for goods or services provided.
• Receiving cryptocurrency as a result of mining.
And this list could grow. Currently, non-taxable events may include: