Hi all and thanks for coming back to CryptoLogic. In the first newsletter, I briefly introduced the background of digital assets (hereinafter “crypto”), explained coins versus tokens, and set some ambitious posting goals. I also promised to jump right into the basic tax treatment of crypto this time because, well, I am a tax attorney and this is primarily a tax series. Here we go…
With the passing of the Tax Cuts and Jobs Act, a massive piece of legislation far reaching into almost all nooks and crannies of the tax code, the taxation of crypto was completely clarified...is what I wish I could say! Rather the taxation of crypto is still heavily reliant on Internal Revenue Service Notice 2014-21, which as you can probably tell, was written back in 2014 (which, in the digital asset space, feels like 474 BC).
In Notice 2014-21 the IRS set out its “Virtual Currency Guidance,” organized in a FAQ style, which essentially acknowledges the existence of the asset class and its ability to function as a medium of exchange, unit of account, and/or a store of value. Importantly, the IRS stated:
“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
With that “answer,” and the subsequent statement that “virtual currency it not treated as currency that could generate foreign currency gain or loss…” the IRS created the main framework for taxation of crypto. Accordingly, making payments or trading crypto for goods or services is a realization event and the taxpayer must recognize a gain or loss upon the exchange (taking into account basis of the original crypto purchase). Conversely, receiving crypto as payment for goods or services is included in computing gross income.
Once the IRS’ classification as property was solidified, it provided an important avenue for the analysis of crypto in a variety of transactions or business operations. However, while crypto transactions can often be quite analogous to established activities (investing, trading, brokering, dealing, market making), other events such as Hard Forks have confounded the tax community with no real consensus reached to date. While Notice 2014-21 was important in the guidance it directly gave, it was almost as relevant in its lack of defining crypto as a “stock” or “security.” Thus, there is also ambiguity as to whether wash sales apply to crypto transactions. We’ll save the discussion of Hard Forks and wash sales for a later edition.
Thanks for reading!
Questions? I am always happy to connect. | Evan Fox at 212.331.7477 or firstname.lastname@example.org
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Evan Fox, J.D., LL.M. is a Berdon tax professional within the Digital Asset Advisory Practice. He advises clients across an array of business sectors on the tax implications of evolving cryptocurrency and blockchain technology.
Note: The thoughts and opinions expressed here should not be taken as investment or financial advice. The goal of CryptoLogic is to educate and enhance interest in the crypto space or a particular asset. It is important that when considering your investment and financial situation, you do your own research and speak with your trusted advisors.