Taxation of Cryptocurrency

We saw for the first time in 2019, the words “virtual currency” on Form 1040 (Schedule 1). There’s been additional discussion and regulation out of the Infrastructure Act that passed in November of 2021. This year on the face of Form 1040, will you be answering ‘Yes’ or ‘No’ again to “receiving, selling, exchanging, or disposing of a financial interest in any virtual currency?” Whether yay or nay, here are five key tax considerations regarding cryptocurrency.

1. Cryptocurrency is currently treated as “property.” In general, sales will be subject to capital gain or rules. You should be tracking your basis and holding periods of each individual cryptocurrency you buy, sell, or exchange. Not all exchanges provide the detailed information necessary to report your transactions.
2. Exchanging cryptocurrency for an item or service will result in a gain or loss to be reported on your tax return. Buying a good or service with cryptocurrency creates a taxable event at the time of exchange at its fair market value.
3. For taxpayers receiving cryptocurrency rewards or staking cryptocurrency, this will result in ordinary income. Platforms offer rewards or promotions for holding cryptocurrency, similar to interest income on a savings account. At the time these rewards are received, they are generally taxable as ordinary income at its fair market value. Some platforms may report this on Form 1099-MISC.
4. The IRS has issued no guidance thus far on sales or exchanges of non-fungible tokens (NFT’s). However, NFT’s may fit the definition of a “collectible” under §408(m) of the Code. Generally, NFTs are purchased with cryptocurrency. As mentioned above, the ‘exchange’ may be taxable, and the basis should be adjusted accordingly.
5. When paying employees or contractors with cryptocurrency, you will need to include such payment in their W-2 or Form 1099. Don’t forget about the two-step transaction: gain or loss on exchange and the expense. The fair market value at the time of payment should be included and may be subject to tax withholdings.

We highly encourage those answering ‘Yes’ on their Form 1040 this year to put some time aside to review their transactions, calculate their basis, and summarize their gains and losses for the year. Please reach out to your KN+S tax professional if you have any questions.

Lou Sierra, CPA, MST, is a Senior Tax Accountant at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.