New students of blockchain and cryptocurrency often complain that the field’s vocabulary is too complicated and its ideas too complicated. Learning about the coins and protocols is complicated, yet most of us engage with a far more incomprehensible system every year when we pay our taxes. How many of us — at least those of us without Certified Public Accountants (CPAs) — can claim to understand the ways of the IRS? Every year brings us new forms to fill, sheets to sign, exemptions to claim, and headaches to treat. Many people celebrate Tax Day not because they expect a refund but simply because they’re thrilled to be free of Internal Revenue for another year. But what happens when these two complicated matters, cryptocurrency and taxes, combine? In 2019, many American taxpayers received a brief introduction to cryptocurrency via their tax preparation software: TurboTax and TaxAct now ask users if they’ve made money through crypto investments.
In some ways, the tax situation for crypto investors resembles that for taxpayers with stock holdings. Just as a stockholder needs to know when they bought an asset, when they sold it (if they sold it), how much they initially paid for it, and how much they received in the sale, crypto investors must keep track of these data points for their digital assets. Some individuals may be able to keep track of these data points with a spreadsheet or two, but active traders or institutions that hold a variety of cryptocurrencies may be overwhelmed by the challenge of reporting.
If you just dabble in dogecoin or experiment with ether, you may be able to handle your crypto tax reporting without recourse to the professionals. If you’ve purchased cryptocurrency but haven’t sold it in the past year, you’re likely in the clear, with no taxable transactions to report. If, on the other hand, you’re actively converting cryptocurrency to fiat or even converting one coin into another, you’ll need to take a serious look at your holdings. Even the way in which you acquire your cryptocurrency may have tax ramifications: A purchased bitcoin may be taxed differently than a mined one, and income from “hobbies” differs from income from a career in cryptocurrency.
Because cryptocurrencies have yet to achieve mainstream ubiquity, most tax preparers will have, at best, little experience and, at worst, no knowledge of digital assets. If you or your organization wants to hire a tax preparer and you need to explain the basic concepts of crypto to them, they’re likely not the best pick! Thankfully, the past few years have seen the emergence of a new class of crypto-specialist tax preparers and accountants. While they some may charge more than less specialized providers, businesses and individuals alike have reported good results. Because cryptocurrency is still largely unexplored territory, it’s possible that auditors may take unusually close looks at taxpayers holding crypto. While no one enjoys paying the taxman, the annual April expense is far better than the alternative, receiving civil or criminal penalties for evasion. And some crypto investors may be in for pleasant surprises: More than once, tax preparers have informed clients that they’ve actually overpaid the government and that the IRS owes them money back!
No one enjoys making their annual payment to Uncle Sam, but the cryptocurrency community should take solace in the fact that the TurboTaxes and TaxActs of the world, just as they should applaud the formation of cryptocurrency tax preparers. For once, good news arrives on Tax Day: Cryptocurrency is entering mainstream discourse.