Maybe you’ve heard something about cryptocurrencies, before, during, or after the recent swings in the market. Whether you’re an individual looking to diversify your portfolio, a business seeking to accept cryptocurrencies, someone with tax questions about gains from trading, or you would just like to know a little bit more about them, here is a guide with our answers to 7 questions we’ve heard about cryptocurrencies.
Start from the beginning, how do cryptocurrencies work?
Cryptocurrency, sometimes called “virtual currency,” is just digital representation of value other than a representation of a government-backed currency, like the US dollar. Cryptocurrencies generally are not controlled by any government or central authority because they are managed by peer-to-peer connections of computers around the world secured by tech called blockchain to verify each transaction made with a cryptocurrency. Blockchain is something like a secure running ledger of transactions that records every time someone sent or received the cryptocurrency.
Why do I care about cryptocurrencies?
One reason people like cryptocurrencies is that they feel more secure using cryptocurrency for online transactions because of the blockchain technology. Others may like cryptocurrencies for their investment opportunity. Fortune has estimated that the global blockchain market size was worth $2.01 billion in 2019 and estimates a value of $69.04 billion by 2027. If your business allows customers to purchase goods or services online, you may have customers who are interested in paying through cryptocurrency.
What tax implications can purchase or sale of cryptocurrency have for an individual?
Per IRS Notice 2014-21, the IRS takes the position that cryptocurrencies are just like ordinary personal property; they are not treated as currency for purposes of US federal tax. Therefore, for example, if you sell your cryptocurrency for more than it was worth as of the date you mined it for the cryptocurrency, (congratulations!) you may have a taxable gain to report. Whether you must recognize the value of any capital gain or loss from your sale of cryptocurrency can be a bit of a complicated question. Keep in mind that if you “purchase” goods or services with your cryptocurrency, you may also recognize a capital gain or loss from the transaction.
One final note on the individual tax side, as of the date of this article, the IRS took the position for the 2020 year that if an individual only purchased cryptocurrency but did not make any other cryptocurrency transactions during the year, then no reporting on Form 1040 was necessary.
Can my tax-exempt organization accept virtual currency donations?
Yes. A charitable organization that receives cryptocurrency as a donation should treat the donation as a noncash contribution to the charitable organization and report the donation accordingly. If a charity sells, exchanges, or disposes of cryptocurrency, it may have additional reporting requirements.
How can I get my business ready to accept cryptocurrencies?
If you are interested in setting your business up to accept cryptocurrency from your customers, some trading platforms, such as Coinbase, Cash App, or Bisq offer resources to allow customers to transfer cryptocurrency to you for payment. Although we don’t suggest or recommend any particular platform, we suggest implementing an internal roadmap for record retention and reporting of cryptocurrency transactions prior to beginning accepting cryptocurrency as payment from customers.
What do I need to know about how cryptocurrencies integrate with my estate plan?
One of the many questions to consider regarding cryptocurrency and your estate plan is ensuring that your personal representative has access to your cryptocurrency when the time comes to wind up affairs. Attorney Joshua Weidemann from O’Connor & Thomas, P.C. was the principal drafter of, and assisted with the passage of, the Iowa Fiduciary Access to Digital Assets Act, which allows individuals to more easily provide their executor or trustee with authority to manage digital assets.
Can you tell me more?
If this article has sparked your interest, or maybe raised additional questions about how you can leverage cryptocurrency to meet your business, privacy, or estate planning objectives please contact us to discuss how we can help you accomplish your goals.