Crypto Accounting

As discussed in my last article, for a US person, any trade, sale or even purchase made with cryptocurrency can result in a US tax liability.

With the fact in mind that the IRS doesn’t acknowledge any cryptocurrency as an actual currency (fiat currency), but rather as a capital asset, we must always consider capital gains tax when any crypto transaction occurs.?

The use of the cryptocurrency effectively crystalizes the value of the asset, determining the value and date of the gain for reporting purposes which then must be applied to the purchases on an acceptable basis.

But, this is where some of the difficulties of cryptocurrency ownership become very apparent. Ordinarily, when investing in the stock market or other similar investments, the broker is required to send an annual 1099 form (or sometimes K-1), which neatly details the total gains and losses made during the year. Further detailed reporting also shows us the purchase date of each particular asset, and the sale date, so we can easily track which specific shares were sold.

Without this, reporting on a tax return would be especially complicated when purchasing the same stock multiple times. Good record keeping is required, in order to know which batch of shares were sold when. This legwork usually occurs on the brokerage side, and is then made available in a format for the taxpayer to file their tax return in an accurate manner.

But, currently no such reporting exists for most crypto providers. This can leave holders or traders of cryptocurrencies with a mountain to climb, to correctly determine their capital gains after a trade or sale.

For some, the lack of reporting required for cryptocurrencies has been welcome, and has unfortunately enabled traders to shield some of their income from the US. However, for taxpayers who fully intend to report to the IRS, it has made life difficult.

This is all about to change under?President Biden’s?American Families Plan, which sets out new requirements ensuring:

-???????Crypto trades over $10,000 will now be automatically reported to the IRS

-???????Crypto brokerages will be required to provide 1099 Forms to their customers, enabling easier reporting on the annual US tax return

This is yet to be fully approved or come into force, but whilst for some it will be an unwelcome change, enabling the IRS to properly tax crypto gains, for many it will also bring crypto into the fold for ordinary investors.