The topics of cryptocurrencies, whether it's Bitcoin, Ethereum, Litecoin, or one of the hundreds of other digital currencies in the market, is one that has probably attracted your attention. Compounding the questions and buzz about these topics is whether or not you should be incorporating cryptoassets into your business.
Accepting payments in Bitcoin or other currencies, or investing in blockchain technology for your business are hot topics, and may very well pay off in the long run. With consumer interest in alternative currencies increasing, being on the cutting edge of the cryptocurrency movement has a lot of upside in terms of market positioning and branding.
In addition to whatever technological and processing issues, including the cost of upgrading your servers to process these transactions, there is a wrinkle you might have overlooked. Specifically, if your business accepted different types of cryptocurrencies during 2017, when virtually of these assets increased dramatically in value, you may owe taxes on the payments you made, and received, in 2017.
Let's take a look at some of the items you should keep in mind this tax season when it comes to digital currencies:
1. Cryptocurrencies aren't actually treated as currencies by the IRS.
This may seem contradictory, but according to both initial guidance issued by the IRS, and updated information released during 2017, items like Bitcoin are treated as capital assets.
So, what exactly is a capital asset?
There are a lot of great definitions online, but thinking of it like owning shares of stock might be an easier to understand this topic. For the purposes of tax reporting, sales, gains, or losses on your cryptoassets are treated just like those linked to shares of stock.
This may not seem like a big deal, but it makes all of the difference when it comes to tax and tax reporting.
2. Reporting is a bit uncertain right now.
With all of the changes coming due to the passage of tax reform, the reporting and taxation of cryptocurrencies remains something beset by uncertainty. As of right now, the IRS does not require third-party reporting, like a form 1099-B, for virtual currency, which may seem like a minor detail, but might have a major impact on your taxes.
Usually, when it comes to stock and other capital assets, which is how virtual currencies are treated, a form 1099-B is delivered to the individual and business as support for tax filings and payments. Without this requirement reporting the gains of losses on virtual currency assets is bound to vary quite a bit -- be sure to work with your CPA to ensure you are in compliance.
3. Taxable events may include more than you think.
Without diving too much into the accounting mechanics, in order to usually count something as a taxable event you have to convert your assets into cash. Cryptocurrencies are a bit different if you are accepting them from your customers to pay for goods and services.
Remember, the IRS treats cryptocurrencies as capital assets, and anytime they are used in exchange for goods or services, this generates a taxable event.
Cryptocurrencies, since they can be used by your customers, and possibly you, to pay for goods and services, generate taxable events every time they are used to pay for anything. One additional item that can complicate tax reporting is that swapping one cryptocurrency for another won't help you sidestep taxes.
4. Even if you don't formally cash out your cryptoassets, you may owe taxes.
I cannot emphasize this point enough, and that is if your business has been accepting cryptocurrencies for payment purposes, you might have swapped some of these virtual assets for other virtual assets. While this might seem like a good idea, and even would seem to be in compliance with Section 1031 of the tax code, which would reduce your tax burden, the reality is more complicated.
Unfortunately, cryptocurrencies are disallowed from qualifying for 1031, like-kind exchange treatment, and what this means for you and your business is as follows:
- If after accepting cryptocurrencies for payments, you swapped one currency for another instead of converting them directly to cash, you are still most likely going to owe taxes.
Taxes can be difficult enough to handle and manage as an entrepreneur, and the passage of tax legislation at the end of 2017 has added additional uncertainty to this already stressful time of year. Cryptocurrencies and virtual assets, while offering convenience and a step up in technology for you and your business, may also generate additional taxes issues. Working with your CPA, reviewing your records, and documenting your gains and losses linked to cryptocurrencies can have you set for a successful tax season this year.