Cryptocurrency Tax Advice

September 17, 2019

Cryptocurrency tax debt collection is here to stay. This has been made very clear by recent statements of the IRS. The IRS has already put a great deal of effort toward backing up its stated intention to enforce tax laws on cryptocurrency gains. We’ve seen an example of this with the 10,000+ letters sent out to cryptocurrency holders. Because tax enforcement on cryptocurrency is not going away any time soon, the best approach for holders is to plan ahead for any possible liabilities. Thinking in this way is probably going to be an adjustment for most crypto holders and investors. But the adjustment is necessary. That’s where good cryptocurrency tax advice comes in.

Who Needs Cryptocurrency Tax Advice?

If you’re a cryptocurrency investor, you need to begin thinking about your investment in purely financial terms. When bitcoin was first starting out, it attracted the most attention from computer programmers, cryptographers and mathematicians. Back then, bitcoin had almost no monetary value.

But now, times have changed. Bitcoin’s value has skyrocketed; other cryptocurrencies, such as Ethereum, have also appreciated considerably in value since their inception. Bitcoin and other cryptocurrencies are no longer just a hobby, they are a serious source of value and should be treated as such. In this post, we’ll give basic tax advice to those who currently have cryptocurrency investments. More than anything, cryptocurrency investors need to step away from the mentality that they are “outside” the system. Notably, everything done in the cryptocurrency realm will ultimately be subject to scrutiny by the IRS. That fact this is something virtual currency investors need to come to terms with.

Why Practical Tax Advice is So Tough

One of the main reasons why giving practical advice on cryptocurrency investments is difficult, is because cryptocurrencies tend to be quite volatile. When bitcoin first launched back in 2009, it had almost no value. Bitcoin literally traded at pennies on the dollar. There was even a famous case of someone paying a pizza delivery with a bunch of bitcoins! Since 2009, the value of bitcoin has jumped up and down in an irregular, unpredictable fashion. Currently, we see bitcoin trading in the low $10,000 range, and it’s been in that range for quite awhile.

Lack of Stability

Although it’s still a stretch to say that bitcoin is in any sense “stable,” it appears that the volatility has decreased somewhat from where it was in the past. A couple of years ago, bitcoin was at nearly $20,000 per coin, with some speculating that it could reach $100,000 per coin at some point. Scrutiny from governments around the world, increased competition from other cryptocurrencies, and other factors have likely contributed to its decrease in recent years.

Giving advice about virtual currency is particularly difficult. It’s difficult to plan for simply because it’s so prone to change. Should crypto investors hold? Should they sell? From a tax planning standpoint, it may be wise to hold onto cryptocurrency for quite awhile. That’s because tax laws may change, and those change could be positive for investors.

Treat Your Cryptocurrency Like Any Other Investment Property

As per Notice 2014-21, remember that your bitcoin or other cryptocurrency is just like any other investment property. This means that it’s treated just like stocks, bonds, gold, foreign currency, and other similar property from a tax standpoint. If we look at current capital gain tax rates, we can see that crypto investors may benefit from some degree of tax planning. Currently, the short-term capital gain tax rate is the same as your federal tax rate for ordinary income. This means that crypto investors should certainly hold onto their investment for more than 1 year. The rates for long-term capital gains are either 0%, 15%, or 20%, depending on your total income. If your income is less than $39,376, then it’s 0%. If it’s between $39,376 and $434,550, then it’s 15%. And it it’s over $434,550, it’s 20%.

Plan Ahead

You can use these brackets and income thresholds to plan ahead, that way, you can minimize your cryptocurrency tax liability. For instance, if you’re self-employed, and are having a slow year, you may want to cash out of your cryptocurrency. That way, you can fall into a lower tax bracket for your capital gains. If you can fall into the 0% bracket by selling your cryptocurrency in this year, it’s better to cash out rather than risk that you may end up in the 15% bracket next year. The key thing here is that cryptocurrency investors need to be aware of current capital gain tax rates and use this awareness to their advantage.

Need Cryptocurrency Tax Advice? Call Us!

At Mackay, Caswell & Callahan, P.C., we’re committed to helping cryptocurrency investors plan for their tax liability to the IRS. We’re following the IRS’ efforts to clamp down on crypto tax debt very closely. If you have cryptocurrency tax debt, the best route is to consult with a tax professional who has knowledge of the cryptocurrency realm. This is one benefit of working with MC&C. That is, we understand what’s going on the cryptocurrency world. We’re conversant with basic crypto concepts and ideas. Give us a call and let us help you resolve matters today. Contact one of our top New York City tax attorneys and we will resolve your case right away.

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