Accounting For Cryptocurrency
The room was packed for this talk. It was given by Andrew Gordon, an accountant that specializes in cryptocurrency. The tax implications of buying and selling cryptocurrency are complex. Some of it is not in stone. Which means we all need to do our homework. The full talk is above, Q&A below.
What’s the gist of accounting for cryptocurrency? Give me an ELI5.
The gist is that whenever you sell or change crpyto (ie. btc to eth), there is a tax implication. If you sell crpto you may have a capital gain or loss, depending on the price that you bought it at. Whenever you buy goods with crypto, this is actually a sale — there is now a tax implication.
Can you explain what capital gains is and how it applies to cryptocurrency?
Depending on the period of time you hold the crypto, the tax rate you pay on any gains will differ. If the crypto is held more than a year, long term capital gain rates apply, which is 15% or 20%. If it is held less than a year, short term capital gain rates apply. Short term rates are your ordinary tax rate — the same rate your other income such as wages is taxed at.
How does the government classify crypto and what does that mean for me and my Bitcoin?
The IRS has classified crypto as “property” rather than “currency.” As such, any increases in value are gains when the property is sold. The IRS has not expressed guidance on other areas of crypto such as whether it is eligible for a “like-kind exhange” (ie. going from btc to eth tax free), whether it is considered a foreign asset if held abroad, and certain treatments if held in a retirement account.
My accountant is over 69, is this a problem?
Only if he doesn’t stay up to date on the crypto tax issues and regulations! This is a new and evolving area of tax law — one also that carries significant penalties if not disclosed properly.
I bought a lambo with my earning last year and didn’t report it.
Ooops! Whenever you buy an item with crypto, this is actually a sale of the crypto. Thus, you had a reportable gain (I presume) when you bought the lambo. For example, you bought a lambo with $400k of BTC that cost only $1k to purchase in 2012. In reality, the BTC was sold when the lambo was purchased and the sale resulted in a $399k gain ($400k — $1k). Assuming you held the BTC for greater than a year, the $399k gain would be taxed at the long term capital gains rate. Even at this favorable tax rate, you still owe quite a bit to the IRS for the lambo purchase…
What the most basic advice you can give to someone buying cryptocurrency?
Be aware of the regulations and requirements, and if you are not, hire a good attorney or CPA!
How about an accounting trick? What if I hold my crypto for more than 2 years than sell it? Or use my Ethereum profits on the dark web to buy a stolen passwords? Good or bad idea?
Since there is a lot of gray in the crypto tax regime, there is room to take aggressive positions. For example, the issue of like-kind exchanges remains unanswered. There are people converting millions of one crypto to another (ie. BTC to ETH), which is by definition a taxable transaction. Now, it is possible for someone to argue to the IRS that it is a like-kind exchange and no tax is due. This position would be disclosed to the IRS and then see what happens… There are certainly arguments towards this treatment!
A great tax minimization strategy is to hold crypto later than a year to achieve the long term capital gains rates. The long term capital gains rates are 15% or 20%.
Update 2020: I have a new crypto investing app called Prospero.
Prospero is gamified DEFI and cryptocurrency investing.
Please visit the link and check it out. I would love to hear what you think about it.
