Cryptic indeed: Tax pros and clients need to know more about crypto
IRS guidelines seem clear: making profits on cryptocurrencies means paying taxes on the gains, with the transactions considered like stock transactions — yet many remain fuzzy on how Bitcoin and other virtual, ether-space assets generate tax — or, for that matter, profit. There seems to be a lot of education needed for both clients and tax practitioners.
“What are they and how did they come into existence? Bitcoin is confusing to me,” said Enrolled Agent Janie Biddix of Advanced Tax Specialists in Dalton, Georgia.
“I’d like to develop and educate my clients about proper recordkeeping and documentation and the tax consequences related to the failure to do so,” said Janet Sienicki, an EA in Schererville, Indiana.
“I have a few crypto clients but I think this is a fad that will fizzle — until an exponential version of it will be the basis of the one world currency,” Chris Hardy, an EA and managing director with Paramount Tax in Georgia.
Volatile but useful
Cryptocurrencies remain headline-catching assets, despite the value of digital money plummeting last fall. Since then, lenders found a silver lining by pushing people who have paper profits to leverage them into cash by borrowing against their cryptocurrencies. A former Wall Street trader, for instance, used some of his Bitcoin as collateral to borrow nearly $100,000, a move that let him keep his cryptocurrency and avert a tax bill on the newly acquired cash.
The tax perk stems from a longstanding principle that assets aren’t taxed until sold, much like borrowing against stock holdings. “Cryptocurrency is similar to an extremely volatile stock or commodity,” said Brian Stoner, a CPA in Burbank, California. “You just need to make sure your clients give you all the information about their purchases and sales so you can calculate gains correctly.”
‘Out of my league’
Tax preparers and clients both seem to want more from tax authorities on how to properly record cryptocurrency and its transactions — and the sooner, the better. “I’d like to see the IRS adopt the American Institute of CPAs’ FAQ on cryptocurrency,” said Nick Preusch, a CPA and tax manager with Top 100 Firm PBMares in Fredericksburg, Virginia. “Clear guidance on forking would be great.”
(A “hard fork” in cryptocurrency parlance is a radical change to the rules of the blockchain that have underlain an individual cryptocurrency, creating, in effect, a new blockchain — and thus, potentially, a need for a change in how the asset is treated. An analogy from other asset types might be a stock split.)
“More guidance on the reporting and valuation requirements surrounding the donation of cryptocurrency to charitable organizations” would be useful, according to Barry Kleiman, a CPA and principal with Untracht Early, in Florham Park, New Jersey. “Also, the tax treatment of a cryptocurrency hard fork: Is it taxable? If so, how do you determine the amount and the timing of the recognition of income?”
Some private sources in the profession, in the meanwhile, try to pick up the slack. “People trade, buy and sell cryptocurrency just like people do on the stock exchange,” reads a recent blog post of The Income Tax School. “As a tax professional, you need to know how to talk to your clients about cryptocurrency.”
The post goes on to offer a very useful glossary; entries range from Altcoins (“any coins that aren’t Bitcoin”) to Whale (“someone who owns a very large amount of cryptocurrency”) to the increasingly familiar Pump and Dump (“the cycle of an altcoin getting a lot of attention, rising quickly in price, and then crashing”).
“Not sure that I really want to learn about bitcoin, cryptocurrency and other new methods of payment. Usually I’m on the bleeding edge of technology, but these currencies seem a little out of my league,” said EA Terri Ryman of Southwest Tax & Accounting in Elkhart, Kansas. “I’m sure that I’ll be forced to study up on them but not until I have a client inquire. Although I am a little bit nervous that they’re already trading with cryptocurrencies and just aren’t telling me when I ask.”