Good recordkeeping can avoid cryptocurrency tax headaches

By Andrew Zashin*

Bitcoin and other virtual currencies continue to make headlines as they are used more and more frequently. Although it remains a favorite currency for illegal sales of drugs and weapons, and for other other “shadowy” transactions accomplished on the dark web, they have became a legitimate method of payment in many above-board transactions, not to mention an investment vehicle. It is, thus, unsurprising that the government has been paying close attention to the ramifications.

Back in 2014, the IRS issued Notice 2014-21 to clarify the treatment of cryptocurrency for federal tax purposes. Note, it is generally treated as property and can be subject to capital gains/losses, but it may also be reportable income if it is received as payment for goods and services. Both before and since, the IRS and other governmental agencies have been focused on the regulation – and the taxability – of cryptocurrency and related transaction.

For it’s part, the IRS has started more than 30 campaigns since 2017 that are intended to educate the public and to ensure compliance. Among compliance efforts, in 2016 the Internal Revenue Service subpoenaed Coinbase, one of the largest exchanges for Bitcoin and Ethereum cryptocurrencies, for the identities, account information and transaction histories for all users. After a court battle and Congressional involvement, the broad subpoena was limited in scope to a small sliver of time and to transactions of $20,000 or more. The identities of average users were spared for the time being, but the message was clear. The IRS is watching these transactions and cryptocurrency users had better comply with the tax laws.

Most recently, the IRS has begun sending letters to thousands of cryptocurrency users it’s identified, reminding them of their obligation to properly report – and pay – taxes on their cryptocurrency holdings and transactions. By the end of this month, more than 10,000 users are expected to receive such letters. While different situations will prompt different versions of the letter – there are purported to be three in total – all are focused on education about filing and tax obligations, as well as where to go to find more information.

Per IRS Commissioner Chuck Rettig, “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.” Commissioner Rettig went on to state that the IRS “is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

At the same time, Blox, a platform for crypto accounting, management and tracking, just released one of the first and most in-depth reports on the state of crypto accounting. Among its findings are that on a small number – perhaps as low as 5% – of certified public accountants believe their individual and business clients are able to accurately track and report their virtual assets and transactions for purposes of proper accounting and taxing. Reasons for improper reporting were chalked up to a lack of understanding of crypto tax rules, and a need for more government regulation and guidance to help clients remain in compliance.

All of this leaves a burgeoning business for crypto accountants, as cryptocurrency users try to stay above the law. For users, the first step is going to be good recordkeeping.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:10-05:00August 19th, 2019|Bitcoin, Cryptocurrency|

Cryptocurrency investing not for the faint of heart

By Andrew Zashin*

Once limited to techie news, cryptocurrency has now hit the finance pages and even mainstream media. Bitcoin, one of the predominant players, was trading at around $1,000 in January 2017. The subsequent months saw enormous jumps, with the value per Bitcoin nearing $20,000. With those sorts of gains, it is no wonder that many have wondered how they, too, could get in the game.

“Cryptocurrency” refers to a subset of digital or virtual currency (and its moniker refers to the cryptography used to create it and transact with it). Unlike traditional money it is not backed by any government. The holder does not have a coin or a bill.

Instead, it is an entirely digital asset. It is created, or “mined,” under controlled conditions, although admittedly the identity of the governing body is sometimes a bit nebulous. It is traded on specialized exchanges created for that purpose. Like other securities, cryptocurrency can be bought and sold. Like traditional government-backed currency, it can be used to purchase goods and services, assuming, of course, the seller accepts it as valid tender.

Bitcoin is not the only player in town, but it has been covered the most widely in the mainstream news given the huge swings in value. Nowadays, it is still up significantly from this time a year ago, but most recently it dropped down below the $10,000 mark as investors dumped it amid concerns about increased scrutiny and regulation. The volatility is enough to give anyone whiplash.

The chairman of the U.S. Securities and Exchange Commission in December released a statement on cryptocurrencies and initial coin offerings, pointing to specific concerns with this market. Warren Buffet has called it “a mirage” and has said the current frenzy surrounding it will “end bad.”

One of the primary risks with this type of investment is the sheer lack of governmental oversight and regulation. Of course, most types of investment come with some risk. But cryptocurrency markets cross national borders and trading may occur on a system anywhere in the world. Invested funds are very likely to leave the United States without your knowledge.

Regulatory agencies such as the SEC may not be able to offer any adequate remedy. The rules may be different wherever the funds end up; South Korea and China, for example, appear to be working toward regulation in their respective nations. Or the body that might otherwise regulate it – the SEC, for example – might not have jurisdiction at all. The definition of the “thing” being traded is in flux, with many arguing that cryptocurrencies are not securities, and that the trading of them is not within the SEC’s jurisdiction at all.

Surely, some have become significantly wealthier for having invested in cryptocurrency. However, it is definitely riskier than your average investment. In this area, the law is continuously evolving and trying to catch up. If you are thinking of jumping on the bandwagon, it has never been more important to do your research to decide for yourself if cryptocurrency is a reasonable investment.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:12-05:00January 18th, 2018|Bitcoin, Cryptocurrency, Investing|

Bitcoins: sound investment or foolish enterprise?

By Andrew Zashin*

This article originally appeared as a column for the Cleveland Jewish News.

In December 2013, a California Lamborghini dealership made national news when it sold a Tesla Model S to a Florida buyer. The car’s value of about $103,000, while certainly unaffordable to the average car buyer, is not what made headlines though. What garnered such attention was the method of payment. The final price tag was, in fact, 91.4 Bitcoins.

Bitcoins have only begun to capture the attention of tech-savvy investors. After all, at the beginning of 2013 Bitcoins were valued in the low-double digits. But by November 2013, they were trading for as much as $1,242 per coin, an almost inconceivable level of growth.

Is it any wonder that many are willing to take a risk on what could be the most lucrative investment in their portfolios? You’re probably reading this and wondering, “How do I get in on this?”

Before you run out – or log in, as the case may be – it couldn’t be more important to do your homework, though. After all, Bitcoin values are extremely volatile and as of this writing are trading at only about $460 per coin. For so risky an investment, it certainly pays to have an understanding of the Bitcoin market so that you can make sound decisions.

First, though, what is a Bitcoin?

A Bitcoin is a specific type of virtual currency. It is not the only such virtual currency, though it is probably the most widely known. The European Central Bank has defined a virtual currency as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”

The U.S. Department of Treasury has defined it more stringently as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.” Bitcoins, in particular, are obtained by mining them (essentially by getting them in exchange for offering up the use of your computing power for purposes of processing other Bitcoin transactions), or by trading other more customary types of currency, services or goods for them. Then, you can spend them on other goods and services.

While that may sound OK, the concerns with Bitcoins are many. First, well-established currencies like dollars, shekels and euros are backed by something. That “something” may be gold, or silver, or at least the full faith and credit of the issuing authority.

Bitcoins are not backed by anything. They are not issued by any government authority, they are not legal tender and they are subject to virtually no regulation. While they are ostensibly self-regulated by their creator to the extent that only a certain number will exist, the number in circulation at any given time is not controlled in the same way as a traditional currency. Thus, there is little protection against market bubbles (and the burst that inevitably follows.) And, while the bank account that contains money is insured by the Federal Deposit Insurance Corp., a Bitcoin account is not protected.

Since Bitcoins exist online, they are can be hacked. In fact, a major Bitcoin exchange shut down after purportedly losing $350 million in Bitcoins. Theft and fraud are big concerns. And, since they may be used anonymously, many lawmakers are concerned that they are too easy to use for anonymous illegal transactions through dubious websites such as the Silk Road.

As is often the case with new technology, governments are seeking to keep up with appropriate laws. Some nations have already begun regulating Bitcoin use within their borders, although enforcement of such laws may be challenging. Most recently, the Internal Revenue Service has determined that Bitcoins constitute “property,” more like a stock share, rather than “currency,” meaning they will most generally be taxed on the gains realized on them.

What happens, though, if you want to use them for their practical application, as currency? They may be used on a number of websites and even in some other brick and mortar locations. But, their value fluctuates widely making it somewhat difficult to determine the appropriate Bitcoin purchase price.

Are they more trouble than they are worth as currency? Are they too volatile to be a reasonable investment? Many believe so. Many others believe in them. Ultimately those are going to be personal decisions. However, if you are considering obtaining, using, or keeping Bitcoins for any purpose it is important to understand what, exactly, is being purchased – a challenge in and of itself given the very small number of individuals who actually understand the algorithms that drive them – so that you make the decision to invest in this most unusual enterprise with your eyes wide open.

*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.

2023-11-10T13:38:15-05:00May 16th, 2014|Bitcoin, Investing|
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