Reporting on crypto-assets: tax accounting for digital assets

[ad_1]

TaxBits Vice President of Tax Solutions Erin Fennimore recently joined Julie A. Foerster (Digital Assets Project Manager at the IRS), Rob Massey (Global Tax Leader at Deloitte), Lisa Zarlenga (Group President of tax policy at Steptoe & Johnson LLP), and Cody Carbone (VP Policy at the Chamber of Digital Commerce) to discuss the past and future of crypto compliance.

Digital assets represent a huge leap forward in efficiency for a growing range of financial and non-financial transactions. Due to their widespread influence and rapidly growing adoption in the United States and abroad, institutions are taking notice. However, one of the main obstacles to further adoption has been the ambiguous tax guidelines for digital assets. This panel looked at regulatory frameworks that can promote clarity for this rapidly emerging asset class.

To open the discussion, moderator Cody Carbone asked: Julie, maybe you can set the scene for us before we start this conversation. What are we really talking about here? What is the current tax treatment of digital assets?

After noting that her view does not necessarily represent that of the IRS, Julie A. Foerster replied: …in 2014, the IRS issued an advisory. And in that notice, it said that what you engage in this ecosystem is called virtual currency. Over the seven years, we’ve evolved, and it’s now called digital assets. So for most taxpayers, if you sell, you will have a gain or a loss. If you earn digital assets or provide services, as an employee or entrepreneur, you will have ordinary income.

Cody went further, So not all tokens are the same, nor are all transaction types. And in its simplest form, for federal tax purposes, virtual currency is treated as property. Rob, maybe you could help explain this to me, because many would say it often looks a lot like money.

Rob Massey then answered the question: Absolutely, and a lot has happened since 2014. We’re talking about digital assets now, and they come in different forms. How do we treat these transactions from a tax perspective? So we have crypto used as a form of payment and we have a series of barter transactions triggering a gain or loss, or taking it as income, using it to pay for employee expenses, these are barter transactions.

All of these trigger a gain or loss, which is complicated, but we also have other types of digital assets. We must therefore ask ourselves what are the rights and obligations of these digital assets attached to a holder? If it’s just used as a medium of exchange, that’s one thing, but what if it’s attached to a protocol? And if there is a right of governance that is granted technologically and the legalese is perhaps a little grey, then what does that represent? Or what about an NFT? There are many different types, not all created equal, and a lot has happened since 2014.

After Lisa built on Robs’ points on the nuance of different crypto-assets, Cody then reset the scene by asking, … What are the main considerations for taxpayers when it comes to reporting transactions? digital assets and how can they ensure compliance with tax laws?

Lisa replied: I would say the first thing is to report. You can make mistakes, and that’s fine, but digital asset transactions must be reported on your Schedule D or 8949. So all transactions you made during the tax year must be reported . Lisa then explained the recent major change to Form 1040 that asks millions of Americans, front and center, whether or not they have engaged with digital assets.

Rob then further explained the immense complexity of crypto-taxation, barter transactions, and record keeping of these transactions, ultimately leading the discussion to TaxBits Erin Fennimore. Erin then explained how difficult it is to complete the digital assets section of Form 1040:

So, I think I would ask the question: does anyone do their taxes manually? We have wonderful advisors like Lisa or Rob who tell us the what, but how do you realize the how? It is extremely complex to prepare your own taxes without crypto involved, then you add extremely complex crypto data… It is almost impossible to calculate this manually and then report it on a tax return. So you take the what and produce it in the how on the TaxBit side of things. We try to facilitate this ability to report accurately when you invest in crypto.

Cody then chimed in: Let’s shift gears a bit and move on to regulatory developments in tax. We are in Washington, after all, and we have a regulator on stage. How has the regulatory landscape evolved in recent years?

Erin replied, So over the last few years, which I think everyone in the public knows something about, we have the IIJA but from the IRS we haven’t seen a ton of regulation. We were eagerly awaiting the 6045 coordination regulations. But we’ve started to see actions from the IRS that tell us they’re listening to the industry and understand the clarification and the deliverance. Whether his informal or formal advice is very important in the industry for many different reasons. So, as Julie mentioned, we’ve seen the move from virtual currency to digital assets, which is a coordination effort with other regulators. We have also seen two pieces since January of this year

The IRS clarified that crypto donations over $5,000 require an appraisal. Now, while this clarification is wonderful, it probably also raises other questions about how you’re going to value certain cryptocurrencies, things like NFTs, because that information isn’t always readily available. The second clarification was about the What can you deduct when your token loses all its value? Today, we even have more movement with the issue of 2023-27 which touches on NFTs.

Julie then adds more clarity to Erins’ points: Very exciting news today, no regulation, but notice and its treatment of NFTs as collectibles. And what I want to reiterate and affirm, you heard today, and his collaboration with all of us. We listen at the IRS. We want to hear from you, and this review is proof of that. This is a 90 day notice. And there are some questions in there and I would venture to say there may be others that we haven’t thought of.

So please take the time to let us know so we can make it right. I think it’s imperative in this space that we get it right and we as an agency can’t do that without all of us. We can’t do it without all of you. And so I will say, just a little outlet for my desk. I am the project manager’s arm of a small but large office where we work together with you and industry, with our private sector partners. Certainly, with software calculations within our own agency or our own agency, it is a very exciting time. But to do it right, we need your help.

To view the entire panel discussion, check out the Vimeo link here at 6:50:00 Download our Digital Assets Brokers: A Complete Guide to US Tax Compliance for an in-depth look at impending tax regulations

[ad_2]