As cryptocurrencies continue their ascent to use in everyday life, it is important that investors are cognizant of the tax consequences they create. The Internal Revenue Service (“IRS”) and the White House expressed their concern over the under reporting of cryptocurrency gains and losses. In fact, President Biden proposed to give the IRS $80 billion to aid in reviewing and enforcing taxation compliance among high earners and corporations, including, in part, income related to cryptocurrency investments.
This proposal places an emphasis on the proper reporting of crypto-transactions. Here are a few important crypto tax principles to keep in mind:
· Virtual currency transactions are taxable by law just like transactions in any other form of property. (The IRS decided against treating cryptocurrencies like traditional currency, opting to instead tax such currencies as property.);
· The sale or other exchange of virtual currencies, the use of virtual currencies to pay for goods or services, or the holding of virtual currencies as an investment may result in tax liability; and
· If you acquire, hold, or sell virtual currencies for investment purposes, any gain or loss resulting from such transaction may be eligible for capital gain or loss treatment.
Along side cryptocurrencies, non-fungible tokens (NFTs) have seen a significant rise in popularity in 2021 as an alternative form of income for sellers and investment for buyers. An NFT is a digital asset that represents a tangible asset, such as a piece of art, athletic highlight, or music. For buyers and non-creator sellers, current IRS guidance indicates that NFTs are to be treated as property, like other cryptocurrencies, for tax purposes. For creators who sell originally minted NFTs, the tax treatment is different as original sellers are subject to ordinary income arising out of the net proceeds of any sale (along with permissible deductions of business expenses such as auction fees, transaction fees, subscription fees, or other feels incurred).
As the nature and use of cryptocurrencies continue to evolve, it is important to keep up to date with current tax law. If you find yourself in of need crypto-tax help, give us a call.
