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Cryptocurrency and taxes: What you need to know about developing issues – Nashville Business Journal – Nashville Business Journal

There’s no question that cryptocurrency is here to stay. Although everyone seems to have their own opinion on the viability of it as an investment or savings vehicle, you would be hard-pressed to find someone that doesn’t recognize its “sticking power. That includes the IRS.
As with most new types of transactions, types of assets, or technology, the first few iterations of IRS rules and regulations do not tend to make things simple or easy. In fact, you will not see the term “cryptocurrency” in the tax code currently. Rather, the IRS prefers the nomenclature “virtual currency.” Regardless, if it walks like a duck, quacks like a duck, and flies like a duck, it’s a duck.
The possible advantage or disadvantage of this particular duck for the taxpayer is that the IRS does not yet seem to have considered all angles of how cryptocurrency works and how it fits into the Internal Revenue Code (IRC) in what they have released as guidance to date.
However, the IRS has made their intentions obvious that cryptocurrency is a focus in coming years, by releasing guidance and by putting the question related to cryptocurrency on page one of Form 1040. Any taxpayer owning (even if not trading) cryptocurrency should watch the developments closely as they unfold.
This article is for any taxpayer that transacts in cryptocurrency. Taxpayers should consider and report their cryptocurrency transactions when planning for their 2021 tax liabilities.
Taxation of cryptocurrency
IRS Notice 2014-21 states that virtual currency is treated as “property” (not “currency”) for U.S. federal tax purposes. As such, the general tax principles that apply to property transactions also apply to transactions using cryptocurrency. Common cryptocurrency transactions include:
According to IRS guidance issued to date, the following general rules apply when determining how to treat transactions involving cryptocurrency for federal tax purposes:
For example, if an investor purchases a Bitcoin for $50,000 and later exchanges the Bitcoin for Chainlink at a time when the Bitcoin trades at $55,000, the investor recognizes a $5,000 capital gain on the exchange (if the holding period of the bitcoin exceeds 12 months). Similarly, if an investor purchases a Bitcoin for $50,000 and at least 12 months later uses the same Bitcoin to purchase a car worth $60,000, the investor recognizes a $10,000 capital gain. The gains and losses are reported on Form 8949, Sales and Other Dispositions of Capital Assets.
Other tax considerations for cryptocurrency
Taxpayers that hold or transact in cryptocurrency should also consider the following:
Cryptocurrency is weaving its way into the fabric of U.S. and global markets. Many taxpayers are utilizing it to supplement tax planning and solve business problems. Be sure to include tax issues as you consider how you own or use cryptocurrency.
Contact the Crosslin tax team at crosslinpc.com or call 615-320-5500 and let us help you with your specific situation.
Crosslin offers tax strategy and compliance, audit and assurance, managed accounting, asset protection, family CFO services, state and local sales tax, valuation, litigation support, managed HR services, cryptocurrency advisory, managed IT and cybersecurity, and other accounting and IT related advisory services.
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