Read Part 1 here.

Crypto Tax Series - Part 2

What Every Tax Professional Ought To Know

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 profitable 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, Crypto Tax Is A Priority For The IRS

The majority of crypto users are uninformed when it comes to the potential tax consequences surrounding crypto. 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) is 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.

Tools like Ledgible Tax exist to help tax preparers segregate and correctly classify crypto gains and losses. In the world of crypto tax there are many more taxable events than simply 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.

Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.

A Secret Message On A Blockchain

A covert message can be found inscribed into the first block of the bitcoin blockchain, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” referring to the London newspaper’s lead story of the day. This edition of the newspaper is now one of the most valuable crypto collectibles to date with asking prices over a million dollars! And since those early days in 2009, crypto has steadily increased in prominence, adoption, and mainstream conversation despite naysayers predicting its demise. Accounting firms in the US have increasingly entered the space launching their crypto tax, accounting, and blockchain practices. The AICPA released a practice aid covering both the accounting and auditing of digital assets. The OCC announced in July 2020 that national banks in the USA now have the authority to provide cryptocurrency custody services. Crypto is simply an area that tax professionals can no longer ignore. In fact, there's tremendous opportunity for accounting service providers to grow their business by offering tax services to cryptocurrency users and crypto investment holders.

https://www.youtube.com/watch?v=13PGZrMKpb8

Wanted: Crypto Tax Savvy Professional

Crypto-savvy tax professionals are now needed more than ever given the significant confusion around crypto tax compliance. It also provides tremendous thought leadership and business development opportunity. Back in March of 2014, the IRS issued Notice 2014-21, stating that virtual currencies are to be treated as property, rather than currency (that could generate foreign currency gains or losses) for US federal income tax purposes. Thus general tax principles applicable to property transactions apply to transactions using cryptocurrency. The 2014 IRS notice left much to be desired and a litany of open questions lingered, given the unique make-up of this novel and emerging financial assets class.  Fast forward to now and the updated guidance received from the IRS in October of 2019 in the form of a Revenue Ruling 2019-24 and updated FAQs, sought to provide more clarity. The updated guidance, however, still left many questions unanswered and created confusion around more nuanced and complex areas (such as air drop and chain forks) that we'll get into later. The AICPA issued another comment letter (a “must-read” if you’re a tax professional) to the IRS in February 2020 to submit their recommendations relating to the updated guidance dealing with the following five areas:

• Revenue Ruling 2019-24 
• New Question on the 2019 Form 1040, Schedule 1
• Frequently Asked Questions
• Form of Guidance
• Prior AICPA Recommendations Not Included in New IRS Guidance

What’s Holding Tax Pros Back?

In speaking with numerous leaders across the accounting, legal and tech community there still seems to be very few crypto tax professionals that understand how crypto works, the complexities, and the related potential tax implications. Primary reasons that were given for this shortage in crypto-savvy tax professionals included regulatory ambiguity, lack of client demand, and uncertainty whether this is an area worth pursuing in the long run.  In this crypto tax series, we’ll explore some of the most common crypto taxable events that every tax professional ought to know and how tools, like Ledgible Tax, can empower professionals to provide a premium crypto tax service to their clients. In Part 2 we’ll learn about the significant priority the IRS has placed on crypto and kick off with our first taxable event. 

Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional

There are over $100 billion in crypto reported to date, with over $10 billion accounted for daily. Accountants need to be prepared for the influx of businesses and individuals that will soon be reporting their cryptoassets for taxation- amounting to over 1 million transactions per month, analyzed continuously. 

In the following video, Verady CEO Kell Canty presents a Webinar on Cryptoasset Taxation, Tools and Outlook for the Accounting Profession. Follow along with this 55 minute video for some useful tips, tricks, and tactics to greater prepare yourself for the growing presence of crypto and other related assets in the accounting field. Investing in this information now could give you a massive leg up on your competitors who are uneducated on the subject matter of cryptocurrency and blockchain.

Kell Canty discusses the current landscape and how accountants can prepare for the future of crypto with Wall Street Blockchain Alliance. 

For more information on the current landscape of crypto taxation and tools head on over to our blog page or click here to give Ledgible Tax, a trusted partner of Thomson Reuters, a free trial. Our blog features a wide array of articles and news stories related to what's new and important in the cryptocurrency industry as well as accounting, and often tying the two fields together.

Mazars in South Africa Selects Verady’s Ledgible for Crypto Asset Confirmations

Worldwide Leading Accounting and Advisory Firm To Use Ledgible for Confirmation of its Global Clients’ Digital Assets

ATLANTA and CAPE TOWN, South Africa, Aug. 18, 2020 /PRNewswire/ -- Verady, the leading cryptocurrency tax and accounting software company, today announced Mazars in South Africa international audit, tax and advisory firm has selected Ledgible to supply confirmation and reporting around its clients' digital currency audits. Understanding how digital assets align with accounting, reporting and verification is key to the adoption of cryptocurrency worldwide. Ledgible is the bridge between cryptocurrency and traditional financial accounting.

Of the eleven Mazars' offices in South Africa, the Headquarters in Cape Town work with many local and global clients with cryptoassets to manage. Mazars is at the forefront of this emerging industry, providing digital currency and blockchain technology services to both domestic and international clients. Ledgible automatically syncs intricate data directly from hosted blockchains and exchanges for these cryptocurrency holdings and transactions which is used by Mazars to obtain the required audit evidence and assurance over clients' cryptocurrency holdings and transactions.

"Traditional accounting practices, risk based audit procedures and reporting frameworks were not designed for cryptocurrency. Our dedicated team however understands the complex challenges our clients face with digital currencies," said Wiehann Olivier, Partner with Mazars in South Africa. "With Verady's solution, tracking, validating and reporting of digital assets become less complex and to include Ledgible in our portfolio of options enables us to connect data to our existing financial platforms making the auditing process seamless for our clients."

"Ledgible offers Mazars a familiar and traditional financial verification, reporting and assurance tool to manage and report confirmations on the digital assets of their clients," said Kell Canty, co-founder and CEO of Verady. "Having an advanced crypto-accounting platform connects the emerging blockchain space with current financial service requirements advancing the cryptoasset industry."

Read the full article here.