Cryptocurrency and Accounting
Consult a crypto tax advisor to navigate the complex world of crypto tax implications with our specialized cryptocurrency tax services.
Are cryptocurrencies taxable in the U.S.?
The Internal Revenue Service (IRS) considers cryptocurrency to be property, not currency. Consequently, general tax principles applicable to property transactions apply to transactions using cryptocurrency. Our cryptocurrency tax services ensure compliance with these regulations.
How is Cryptocurrency Income is Classified for Taxes by the IRS?
Cryptocurrency income in the U.S. can be taxed as either capital gains or ordinary income, depending on how it was acquired and used. The classification determines the tax rates and obligations, making it essential to align with IRS guidelines. Here are six key considerations for classifying cryptocurrency income
Buying and Selling Cryptocurrency for Investment
Income is classified as capital gains if you acquire and sell cryptocurrency as an investment, similar to stocks or other property.
Receiving Cryptocurrency as Employee Compensation
Cryptocurrency wages from an employer are considered ordinary income and are subject to payroll and income taxes.
Using Cryptocurrency to Pay for Goods or Services
Paying with cryptocurrency for products or services is treated as a taxable event, with potential capital gains or losses on the transaction.
Earning Cryptocurrency Rewards from Mining, Staking, or Airdrops
Rewards received through mining, staking, or airdrops are classified as ordinary income and taxed based on their fair market value at receipt.
Receiving Cryptocurrency for Goods or Services in Business
Payments received in cryptocurrency from customers for goods or services are treated as ordinary income, taxed at your business income rate.
Disposing of Cryptocurrency Held for Personal Use
If cryptocurrency held personally (not as an investment) is sold, any gain or loss may be taxable as capital gains.
Proper classification of cryptocurrency income ensures accurate tax filing and compliance with IRS standards. Our cryptocurrency tax services specialize in navigating these complexities to help you stay compliant.
Are Cryptocurrency Transactions Anonymous?
While cryptocurrency offers a level of privacy, the idea of complete anonymity is a misconception. Here’s why:
Identity Disclosure on Exchanges
Most major trading platforms require users to complete Know Your Customer (KYC) protocols, which involve verifying their identity. When cryptocurrencies are converted into fiat currencies (like USD or EUR), this information can be shared with regulatory authorities.
Deposits Into Bank Accounts
When unreported cryptocurrency transactions lead to deposits into traditional bank accounts, these transfers can attract attention and trigger inquiries or audits, especially if they appear inconsistent with declared income.
Public Blockchain Records
Blockchain technology is inherently transparent. Every transaction is recorded on the blockchain and accessible to anyone. If your wallet address becomes linked to your identity, all transactions associated with that wallet—past and future—become traceable.
Emerging Blockchain Analysis Tools
Governments and private organizations increasingly employ sophisticated blockchain analysis tools to track and identify transactions. This is part of a broader effort to combat illegal activities such as tax evasion, money laundering, and fraud.
Flagging of Related Wallets
Once a wallet is identified, any wallets interacting with it may also be flagged. This extends the network of traceable activity, making even indirect transactions more transparent to authorities or analysts.
Regulatory Changes
Laws are evolving quickly. Many jurisdictions now mandate the reporting of certain crypto transactions, reducing the potential for anonymity even further.
Identity Disclosure on Exchanges
Most major trading platforms require users to complete Know Your Customer (KYC) protocols, which involve verifying their identity. When cryptocurrencies are converted into fiat currencies (like USD or EUR), this information can be shared with regulatory authorities.
Public Blockchain Records
Blockchain technology is inherently transparent. Every transaction is recorded on the blockchain and accessible to anyone. If your wallet address becomes linked to your identity, all transactions associated with that wallet—past and future—become traceable.
Flagging of Related Wallets
Once a wallet is identified, any wallets interacting with it may also be flagged. This extends the network of traceable activity, making even indirect transactions more transparent to authorities or analysts.
Deposits Into Bank Accounts
When unreported cryptocurrency transactions lead to deposits into traditional bank accounts, these transfers can attract attention and trigger inquiries or audits, especially if they appear inconsistent with declared income.
Emerging Blockchain Analysis Tools
Governments and private organizations increasingly employ sophisticated blockchain analysis tools to track and identify transactions. This is part of a broader effort to combat illegal activities such as tax evasion, money laundering, and fraud.
Regulatory Changes
Laws are evolving quickly. Many jurisdictions now mandate the reporting of certain crypto transactions, reducing the potential for anonymity even further.
Key Takeaway
While cryptocurrency can provide a sense of privacy, it’s not synonymous with anonymity. Taxpayers and traders should operate transparently and comply with relevant regulations to avoid potential legal or financial consequences.
What consequences arise from failing to report income involving cryptocurrency
Failing to report cryptocurrency income can lead to severe repercussions, ranging from financial penalties to criminal charges. Proper reporting and compliance are essential to avoid these consequences. Key outcomes include:
Tax Penalties and Interest
- Failure-to-File Penalty: 5% of the unpaid tax per month, up to 25%.
- Failure-to-Pay Penalty: 0.5% of the unpaid tax per month, up to 25%.
- Underpayment Penalty: 20% of the understated tax liability.
- Interest: Accrued on unpaid taxes until the full amount is settled.
Civil and Criminal Charges
- For willful tax evasion or fraud, the IRS may impose a fraud penalty of up to 75% of the unpaid tax or pursue criminal prosecution, which can lead to fines and imprisonment.
Reputational and Financial Damage
- Tax issues can harm your credibility, affect loan approvals, and create lasting financial challenges.
Increased Audit Risk
- Non-compliance significantly raises the likelihood of an IRS audit, which may extend to other areas of your finances
When Are Cryptocurrency Gains or Income Taxable?
Cryptocurrency income or gains are realized for tax purposes when the following events occur
How do I calculate the gains and losses upon disposition of cryptocurrency?
The computation of gains and losses associated with the disposition of cryptocurrency can be a complex endeavour, often warranting professional guidance as the optimal approach. The determination of proceeds and cost basis involves the consideration of multiple factors.
Purchase price
Consider the price paid to acquire the cryptocurrency, including transaction fees
Holding period
Consider how long the cryptocurrency has been held for: one year or less; more than one year
Selling price
Consider the fair market value of the consideration received for the cryptocurrency disposed of and transaction fees
Hard forks and airdrops
Consider the value of additional units received in these events
Quantity
Track the amount of cryptocurrency involved in transactions
Accounting methods
The IRS prefers specific identification but also accepts first-in, first-out (FIFO) for tracking cost basis; last-in, first-out (LIFO) is possible but not recommended
Why Us
Educating Clients
We focus on empowering our clients with the financial knowledge and resources needed to make informed decisions and achieve long-term success.
Seasoned Experts
Our team of experienced professionals brings extensive expertise in accounting and tax regulations, delivering reliable and thorough solutions tailored to your needs.
Personalized Solutions
We customize our services to fit the unique financial circumstances and goals of each client, offering targeted solutions that effectively address their challenges.
Modern Approach
Leveraging the latest technologies and innovative strategies, we deliver efficient, forward-thinking accounting and tax services designed to meet the evolving demands of businesses and individuals.
Frequently Asked Questions (FAQs)
Cryptocurrency is considered property in Canada. Selling cryptocurrency would result in a capital gain or loss. Depending on the holding period, the capital gain or loss can be short term (held for one year or less) or long term (held for more than one year).
Capital gains and losses are calculated based on the difference between the cost basis and the proceeds of the cryptocurrency being disposed of. For coins bought at different times, the IRS prefers specific identification to track cost basis as it provides the most accurate records. If you cannot specifically identify the coins sold, the IRS allows first-in, first-out (FIFO) as the default method. Last-in, first-out (LIFO) is possible but not recommended and you need to justify the use of this method and apply it consistently.
No, paying someone with cryptocurrency for goods or services they provided to you is considered a disposition of cryptocurrency, necessitating capital gain/loss calculations. The proceeds of disposition is based on the fair market value of the goods/services received.
Use Form 8949 Sales and Other Dispositions of Capital Assets to report capital gains or losses from selling cryptocurrency held as a capital asset. If you receive payments in cryptocurrency for goods or services you provide, report the income on Schedule C (Form 1040) Profit or Loss from Business. If you realize other ordinary income from forks, staking, mining etc., report the income on Schedule 1 (Form 1040) Additional Income and Adjustments to Income.
The applicable tax rates are contingent on the type of crypto income (capital gains vs ordinary income), holding period (short term vs long term capital gains) and your existing tax bracket. Hence there isn’t a specific tax rate for crypto income per se.
No, transferring cryptocurrency between your own wallets is not a taxable event. However, it is important to maintain detailed records of such transfers, including dates and amounts, to verify that no taxable disposition occurred. If the transfer involves converting cryptocurrency to fiat or exchanging it for another cryptocurrency, it may trigger a taxable event.
In general, expenses incurred to generate income or gains from cryptocurrencies may be eligible for potential tax deductions. However, it is advisable to seek guidance from a qualified tax professional to assess the eligibility of these expenses.
Yes, mining and staking rewards are typically considered ordinary income upon receipt of the rewards. They are reported on Schedule 1 (Form 1040) Additional Income and Adjustments to Income.
Yes, when you receive property (including cryptocurrency) for goods or services you render, you realize business income. The amount of income is measured by the fair market value of the cryptocurrency when received, which also forms the cost basis of the cryptocurrency.
Yes, this is considered a disposition, necessitating capital gain/loss calculations. The gain/loss is the difference between the fair market value of the other property received and the cost basis of your cryptocurrency exchanged.
Yes, this is considered a disposition, necessitating capital gain/loss calculations. The gain/loss is the difference between the fair market value of the cryptocurrency received and the cost basis of your capital asset exchanged.
- No, you generally do not pay taxes on cryptocurrency that you hold without selling, as no taxable event has occurred. However, certain activities, such as earning staking rewards, mining income, or receiving crypto as payment, are taxable even if you don’t sell the assets.
How much will it cost for TMP to do my crypto gain and loss calculation?
Basic
Number of Trades:
Up to 100 trades
Centralized Exchanges:
Up to 3 exchanges
Blockchains (DeFi):
1 blockchain
NFT Trades:
Up to 10 trades
Staking/Yield Farming:
Up to 50 transactions
Services Included:
- Calculation of gains/losses
- IRS compliance verification
Expert
Number of Trades:
Up to 1,000 trades
Centralized Exchanges:
Up to 5 exchanges
Blockchains (DeFi):
Up to 5 blockchains
NFT Trades:
Up to 50 trades
Staking/Yield Farming:
Included with moderate activity
Services Included:
- Detailed tax reporting, including DeFi transactions
- Staking/yield farming income tracking
- IRS audit support for crypto activities
Premium
For individuals with complex and high-volume cryptocurrency portfolios.
Number of Trades:
Up to 5,000 trades.
Centralized Exchanges:
Upto 10 exchanges
Blockchains (DeFi):
Up to 7 blockchains
NFT Trades:
Up to 100 trades
Staking and Yield Farming:
Up to 800 transactions
Services Included:
- Comprehensive tax reporting across all platforms
- NFT portfolio analysis and tax implications
- Personalized IRS compliance and audit support
Next Steps
Step 1
Please fill in this questionnaire
Step 2
Schedule a consultation with
one of our CPAs to receive
a final quote and a checklist of
the required data.
Step 3
Upload requested data
onto cloud folder shared
- CONTACT US
