Crypto Is Booming (Again)

Payments company Square, Inc. first allowed Cash App users to purchase and sell bitcoin during the rampant crypto boom of 2017. Since then it has continued to invest in its bitcoin offering, a move that seems to have yielded prolific results.

According to Square’s 2020 Q2 SEC filing, for the six months ended June 30, 2020 and 2019, bitcoin revenue amounted to $1.2 billion and $191 million respectively. The financials indicated that the primary driver behind the soaring 520% increase “was due to growth in the number of active bitcoin customers, as well as growth in customer demand”.

Of course Square is just one of the myriad options available for users to trade crypto today. Coinbase for example, one of the largest and most popular crypto exchanges in the U.S. boasts over 35 million users and over $7 billion in custody.  

Yes, This Is A Priority For the IRS

Unfortunately, many (if not the majority) of crypto users, have been and still are, uninformed when it comes to the potential tax consequences. 

Speaking with accounting firms, tax professionals, and leaders in the crypto community, it is alarming to discover how many users didn’t give much thought to the tax implications at all. Some think that the IRS will not be able to track or trace their trades back to their identity. Ouch.

During 2019 we saw the IRS sending out over 10,000 warning letters to cryptocurrency users to file amended returns if appropriate and pay back taxes. The IRS recently also released the 2020, 1040 draft form, where we can see the virtual currency question has moved from Schedule 1 to near the top of the main form, right under the name and address, asking, “At any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?”. “Virtual currency” was also included in the 2019–2020 IRS Priority Guidance Plan. These are all unmistakable signals that the IRS is prioritizing crypto. 

Taxable Event: The Sale

So, let’s begin with the basics. Selling crypto for fiat (e.g. USD) will be a taxable event.  The character of the gain or loss depends on whether the crypto is a capital asset (e.g. stocks, bonds, and investment property) in the hands of the taxpayer and the length of time the position was held. 

For example, “hodling” (slang in the crypto community for holding the crypto rather than selling it) crypto as a capital asset for longer than a year before selling it will generally result in a long-term capital gain or loss. If the crypto was not held as a capital asset, but rather as inventory for sale in a trade or business, the resulting gain or loss recognized will generally be ordinary in character.

In the world of crypto, there are, of course, many more taxable events then simply your client selling their crypto for cash. Let’s take a look at some of the other most common transactions in crypto that may result in taxable events.

Tax Professionals realize traditional tax software simply does not provide the critical features needed to account for crypto transactions. Why not give Ledgible Tax a try for free? Legible Tax is AICPA SOC Certified and a Thomson Reuters Partner.

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