Are you a cryptocurrency miner, investor, dealer, or trader? There are things you can do to improve your US tax situation while remaining compliant with the IRS. But it’s important first to understand which status applies to your situation—are you considered a miner, investor, dealer, or trader? From a tax perspective, this matters because certain tax rates and deductions apply to certain statuses.
The Differences Between Crypto Miners, Investors, Dealers, and Traders
Miners – Miners are individuals or businesses that receive cryptocurrency as a reward for solving algorithms. The algorithms they solve are required to verify transactions (or blocks), which then become part of the block chain. The activity of mining or solving the algorithm is normally conducted through a series of computers and servers. Mining requires a significant amount of computer hardware, processing power, electricity, and time.
Investors – Investors are individuals or businesses that own cryptocurrency but do not hold it as inventory in a trade or business. Instead, they hold it like many other investments, such as stocks and securities.
Dealers – Dealers are businesses that buy virtual currency from, and sell it to, customers. They make money by serving as the middle person. They may potentially hold cryptocurrency as inventory.
Traders – Traders are a hybrid of investors and dealers. They are generally individuals who engage in buying, selling, and exchanging virtual currency for profit. They don’t hold cryptocurrency as inventory or sell it to customers. But they are considered to carry out a trade or business by carrying out a significant volume of transactions in order to make money off of increases in value.
How We Can Help You
We advise all types of cryptocurrency users on opportunities to reduce your taxes, simplify your information gathering and reporting, and structure your operations for tax-efficiency. Your status as a miner, investor, dealer, or trader determines whether your income will be treated as self-employment income, investment income, or business income. It also determines which deductions you can claim, the tax rates that will apply, and the tax-saving opportunities available to you.
Miners, investors, dealers, or traders come to us with different needs, and we provide tax support tailored to their specific situations.
Tax Advice for Cryptocurrency Miners
We advise miners on:
- Implications of mining within vs. outside the US
- Whether it makes sense to set up a business entity for your mining activities
- Actions that may limit your ability to claim losses or deductions
- How hobby, self-employment, and contractor rules apply to your situation
- Whether your specific mining activities enable you to claim deductions for your home office, qualified business income, and other expenses
- Ways to maximize your deductions and reduce your taxes
Optimizing Your Tax Position
If you qualify as a trade or business, we can help you select the business entity that will be most advantageous from a tax perspective. And we’ll help you understand the pros and cons of sole proprietorship, partnership, S corporation, and C corporation business structures. We can also determine how and when you should report crypto activities on your tax returns.
Tax Advice for Cryptocurrency Investors
For many investors, the biggest tax challenge is obtaining the right data and figuring out how to translate those data into transactions on your tax returns.
Most exchanges currently provide comma-separated values (CSV) files in an Excel spreadsheet that detail all crypto transactions for the owner of the cryptocurrency. The IRS is dedicating very specific resources to figure out how the exchanges should report this information through informational reports such as Forms 1099 or 1042-S. Until that reporting is implemented, taxpayers must calculate the gains and losses related to crypto transactions themselves. At The Wolf Group, we have a dedicated team of tax preparers who have significant experience with financial recreation such as this.
We advise investors on:
- Proper reporting of transactions on your tax returns
- Data you’ll need to obtain from your exchanges to figure out whether you have gains or losses from your cryptocurrency investments
- Tax treatments for air drops, hard forks, soft forks, chain splits, and other cryptocurrency events
- How to proceed when information is not available from your exchanges
- How to handle reporting of multiple cryptocurrencies in various currencies
- Ways to obtain acceptable valuations
- Whether you can defer tax through like-kind exchanges, investment in qualified opportunity zones, and other actions
- Logistics for donating cryptocurrency to charity or holding it in your US qualified retirement plans
Tax Advice for Cryptocurrency Dealers
Dealers of cryptocurrency have an inherently higher risk of IRS audit due to their status as a dealer. So, it’s important to get good advice on selecting the proper accounting method, recordkeeping, and any other related items.
We advise dealers on:
- Forms needed to report your cryptocurrency inventory
- Calculation of gains and losses on sale of cryptocurrency to customers
- Information you should keep on file in case the IRS asks for substantiation of your deals
- How to handle the 30% withholding taxes and informational forms (such as Forms W-8BEN and W—8BEN-E) for the sale of cryptocurrencies to non-US customers
- Whether it makes sense to set up a business entity for your dealing activities, and if so, what type of entity would make sense for your particular facts and circumstances
Tax Advice for Cryptocurrency Traders
Often, being classified as a trader can provide significant tax benefits. We advise traders on:
- How to obtain “trader” status under the Internal Revenue Code and how many trades must be executed per calendar year
- The benefits of being treated as a trader rather than just an investor
- The difference between “trader” status and “material participation”
- The type of recordkeeping needed
- How trades are reported on your tax returns
- Whether you can obtain deductions for your computer hardware, software, electricity, and other expenses
Other Tax Support for Crypto Miners, Investors, Dealers, and Traders
Cryptocurrency clients, both individuals and businesses, are some of our most valued clients. In addition to tax advice and planning, we can help you with:
Informational Reporting of Cryptocurrency Wallets
Don’t forget! If you hold cryptocurrency in an online wallet (on one of the cryptocurrency exchanges), then you may also need to report it on another form on your tax return: Form 8938, Report of Specified Foreign Financial Assets. This form is required if:
- The server that supports the cryptocurrency exchange is located outside the US (most servers are, even for many cryptocurrencies commonly thought to be based in the US)
- The maximum value of your cryptocurrency, together with the maximum values of your other foreign financial assets, exceeded certain thresholds at any point during the year.
If you are required to file the form but fail to do so on time, heavy penalties apply. They are usually $10,000 per month, up to $50,000. In addition, failure to file the form means that the statute of limitations may remain open, so the IRS can audit your return at any time in the future.
Why The Wolf Group?
Since 1983, we’ve worked with clients in the United States and abroad on international tax matters. We have a long history of “cleaning up” complex tax returns, reporting foreign assets, and reconstructing financial records.
Check out our extensive team of CPAs, all with vast international tax experience.
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