The holidays are fully upon us, and I’ll have more to say along those lines next week. But, as is usually the case, there are many tax and regulatory things to handle before EOY, and I want to keep you abreast of all those things whether you’re one of my Castle Rock clients or not.
One of these is something I have written about before, but there have been new … developments. I’m talking about crypto regulations.
Now to many, cryptocurrency seems like something from a VR video game – as in, not real or something clouded with mystery (and a little danger).
And there have been a lot of ups and downs in the market since it opened to the public in 2009 … and a lot of money to be made (and lost) for those dealing in that world. As with many new things, regulations have taken time to catch up.
Which is why so many early adopters flew under the radar and made some serious profit since its inception.
And now, as these cycles go, the government wants to cut in, regulate it, and get its fair share. Now, the general consensus is regulation is needed in the sometimes wild world of crypto, but as we can see post-GameStop/Robinhood and the FTX fraud and subsequent meltdown, these governmental regulation efforts seem to still be lacking. Some are wondering if the SEC and the government can actually successfully enforce regulations.
Despite all of this slowness and NEW controversy, there are indeed tax regulations taking effect for your 2022 filing that you’ll need to seriously consider if you plunged (or even dipped your toe) into the crypto waters.
And, since filing season is around the corner, it might be good for us to get something on the calendar now to discuss crypto regulations and your tax situation in depth:
calendly.com/davidforney
And even if you aren’t ready to chat, or you didn’t go crypto crazy, or if you did and want a starting point… here’s my tax pro insight on what IRS cryptocurrency crackdown might mean for you…
The New Crypto Regulations and Castle Rock Traders
“People buy and sell them because they hope they go up or down just like they did with tulip bulbs a long time ago.” – Warren Buffett
Cryptocurrency: Love it or hate it, hold it or ignore it, you have to admit it sure isn’t dull.
The IRS agrees — and everybody’s favorite federal agency is beginning to pay attention to the tax enforcement of this headline (headache?) asset.
Here’s what to know about the new crypto regulations if you’re thinking about (or already are) investing in crypto as the government takes a harder look at the world of digital currency.
Big losses
Did someone say “headlines?”
Heaven knows a buck isn’t worth what it used to be — but when FTX, a crypto exchange you may have heard of recently, goes from being worth tens of billions of dollars to bankrupt in a week, what in the world kind of investment is this?
Sure, an individual company (even a huge, Enron-sized one) can crash and burn. But what about Luna, a crypto token that went from about a buck to around 116 dollars before it turned into a cinder last spring?
Crypto is so wild that the feds are taking more overall interest in it, most recently in a variety of bills to curb virtual’s murky issues. The Biden administration cut an executive order earlier this year requiring various federal agencies to produce reports relating to crypto regulations (nothing spells “government action” like a report …). Soon after, the Securities and Exchange Commission said it plans to register and regulate crypto exchanges.
Serious attention from Washington is starting to feel like just a matter of time.
Why so tense, IRS?
The feds want to make sure that crypto owners pay their fair share of taxes. One recent study estimated the feds are missing out on 50 billion dollars a year in tax money by not corralling crypto holders with timely and effective crypto regulations.
You may have noticed something new from the IRS on your recent tax returns, most recently right at the top of Form 1040:
“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” (There was a slightly different question on the previous year’s 1040.)
Simple question and you had a simple choice of answers: Yes or no.
Despite nagging taxpayer confusion (which expanded instructions may or may not alleviate), the IRS has plowed ahead with a new version of the question for the upcoming 1040:
“At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
(This expanded question is intended to eyeball digital assets besides cryptocurrency, such as non-fungible tokens, aka NFTs.)
Lots of potential fraud and no clear directions yet — never a good combination … By the way, don’t even think of fudging this answer on your tax return.
So what do you do?
The IRS treats cryptocurrency (at least for the moment) as “property” for tax purposes, not unlike a share of stock. When you sell virtual currency, you recognize capital gain or loss on the sale. The familiar rule of holding the asset for a year or less or a year or more marks short- and long-term capital gains.
Among other crypto regulations:
I got paid in crypto. That’s taxable income. For the self-employed, the fair market value of virtual currency received, measured in U.S. dollars as of the date of receipt, is self-employment income and you owe self-employment tax on it.
I paid someone in crypto. If you pay for a service using virtual currency that you hold as a capital asset, then you have exchanged a capital asset for that service and will have a capital gain or loss.
I swapped the virtual currency I had as a capital asset for other property, including for goods or for another virtual currency. You’ve got a capital gain or loss.
Somebody gave me crypto. You don’t recognize the income until you sell, exchange, or “otherwise dispose” of that virtual currency.
Now we come to the age-old question many taxpayers ask sooner or later:
How are they ever going to know?
And isn’t crypto huge, worldwide, and anonymous? Not as much as it used to be. Just recently, the IRS notched a federal court’s greenlight to see trader and investor info from a crypto dealer — a dealer with tens of thousands of crypto holders and users.
Here’s another age-old question many taxpayers ask: How do I defend myself?
Keep all records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the currency. And accept that there might be new sheriffs in town in crypto’s Wild West. And even if crypto regulations are still developing, they’re going to enforce the ones that are fully in play right now. Get ready.
With the cryptocurrency crackdowns (and fallouts), making sure you stay on the right side of things with the IRS is going to take a little more concentrated effort…
You’ve either got to understand the tax code regulations on this or get one really great Castle Rock someone on your team who does (ahem).
And we’re here to help you handle all tax questions — new-fangled or otherwise.
Ready to serve,
David Forney