The world of digital assets, collectively known as crypto, has rapidly expanded in recent years.  Initially, virtual currencies such as Bitcoin, Litecoin, and Ethereum were only used for trading and transferring value across the internet.  Then came Defi, short for Decentralized Finance.  This has expanded the world of digital assets to include NFTs, stablecoins, staking, liquidity-providing, and more.  Our comprehensive FAQ explains what you need to know to stay on good terms with our dear friends at the IRS and how we can help.

Does the IRS care about crypto?

Yes, they do.  Tax evasion is a priority for them.  They have started including a question to all taxpayers on 1040 forms regarding their participation in virtual currencies.  Also, many exchanges now provide yearly 1099 forms to customers and the IRS, putting many crypto users on their radar.  In addition, they have also won cases against many crypto exchanges to obtain customers’ crypto data.

Do you have to pay taxes on crypto?

Yes.  The most common event that triggers a tax liability is if you have sold or exchanged any crypto.  Some people mistakenly believe that since they never sold their crypto for fiat money (paper money like the US dollar), they do not have any tax liability.  The IRS has made it clear this is not the case.  A taxable gain or loss is incurred not only when exchanging crypto for fiat money but also when exchanging crypto for another crypto.  Even if you never sold your crypto for US dollars, never withdrew your money back to your bank account, but instead only bought and sold crypto with crypto, you would still be required to report these transactions.

Notice 2014-21 from the IRS spells it out in technical detail.

What is the tax rate for gains from selling the crypto I bought?

These gains are called Capital Gains.  If you booked the gain after holding under a year, they are taxed at the same rate as your ordinary income.  If you have for at least a full year before selling, they are taxed at a reduced rate.

I have never sold any crypto, but I have received crypto via airdrops, mining, staking or as a payment.  Am I off the hook?

No, these events trigger the other taxable component of crypto, which is income.

An airdrop is when you are given free coins for any number of reasons, whether it’s for using a certain defi protocol or for simply owning a wallet.  While the vast majority of airdrops that take place on a network are of worthless coins, some airdrops are worth a substantial amount.  If the airdrop was worth anything when you received it, it must be reported as income, even if you never sold it.  Mining is a term used to describe the process by which users contribute their computing power to increase the security of certain crypto networks, such as Bitcoin, Litecoin, or Dogecoin.  In return, these “miners” are paid with the coin of the network they are helping to secure.  Today, most crypto networks do not rely on mining.  Instead, they rely on a different mechanism called staking.  Staking is when a user locks up their coins as collateral in a smart contract with the agreement to run the network honestly in return for more coins.  If they behave dishonestly and attempt to manipulate the network for their own advantage, they risk losing their staked coins.  Staking is easy for most users as you don’t necessarily need to be running the network on your computer in order to participate.  Coins received from both mining and staking are classified as income, as is crypto received as payment for goods or services.  The tax rate for reportable income depends on your tax bracket.

What are the advantages of using a professional accountant?

There are numerous ways to reduce your tax bill, and this is a major part of the value a professional accountant brings to the table.  We can help you select the best tax strategy to reduce your tax bill.  This includes selecting the optimal accounting method (FIFO LIFO OPTI ZERO etc.), using crypto fees to reduce your tax burden, and eliminating reporting errors.  You will also have peace of mind knowing that your crypto is being accurately tracked and accounted for.

How can you help me?

We use a powerful tax reporting and portfolio tracking software called Cointracking.  You would purchase a plan and then link your account to our firm’s account via a code we send you.  It’s easy to set up and import your trades.  Any centralized exchanges you have used, such as Coinbase or Gemini, are linked via API.  Any crypto wallets you have would be imported by simply pasting your public address into Cointracking. After your data is imported, our crypto specialists will take over to ensure your report is accurate, complete, and error-free.  Our team has been involved in crypto since 2014, so we are extremely knowledgeable of the many complexities of the crypto world.

What can I do to help shorten the amount of time it takes to complete my tax report?

Please import all the crypto wallets and exchanges that you have traded on.  This dramatically shortens the time it takes to produce an accurate report.  During the data assembly process, we sometimes find clients’ wallets that they forgot they had.  It’s the digital equivalent of finding money in your pocket.  If you are unsure whether to include a wallet or exchange data, please contact us; we will be happy to help.

I have been scammed out of a lot of crypto.  What can I do?

Sadly, many people have faced this situation where they have unwittingly sent crypto to a scammer.  Contact us to find out what steps you can take to claim a loss.

I have lost money in bankrupt exchanges like FTX and Celsius.  What can I do?

If an exchange is found to be operating a Ponzi-type scheme, customers who lose funds may be entitled to a deduction that is not subject to the normal limits on losses from investments.  Investors need to consult with a tax professional to determine the specific tax treatment of any losses they may have suffered.

How do I report NFTs?

Gains or losses from selling NFTs are often capital gains.  These are imported into Cointracking via your public address.  We then track your NFTs individually on Cointracking to make sure your gains and losses are accurate if you ever sell them.

I am involved in defi by liquidity providing, yield farming, staking, or borrowing.  How do you keep track of these?

Liquidity providing (LP’ing) is where the user contributes one or two different coins into a shared liquidity pool in return for LP tokens.  These LP tokens are then redeemable for your share of the liquidity pool.  After redeeming your LP tokens, you will often receive a different amount of the assets than you originally contributed.  Yield Farming is when you “stake” or lock up these LP tokens to earn further coins.  All these transactions are automatically imported when you import your wallet address into Cointracking. But these transactions can be complicated, and it takes experience to ensure they are being correctly reported.  Some borrowing and lending transactions must be entered manually, in which case our team scans the network’s block explorer to confirm what took place on-chain.

Will you represent me if I am audited?

Yes.  We have successfully represented clients who have had their crypto transactions audited by the IRS.  

How do I get started?

Contact us via email or phone to get started.  We will schedule a brief introductory meeting to get to know your situation and answer any questions you have.  After you start importing trades into Cointracking, our team will get back to you with any follow-up questions and take care of the rest.