US Tax Reporting for Cryptocurrency, Like Bitcoin, Ethereum, Litecoin, Ripple and Others

The use of cryptocurrency is on the rise. We see it with our own clients, who include miners, investors, international business people, and regular citizens buying goods or services with crypto.

We also hear many myths repeated among crypto users. Myths surrounding:

  • How the IRS sees cryptocurrency
  • What happens if you don’t report it on your tax returns
  • Whether owners can remain anonymous

#1 MYTH

Digital currency is money, just like regular currency, except electronic.

REALITY

The IRS considers cryptocurrency to be property, not money. This means that each use of cryptocurrency typically has tax implications. Whether you use it to buy a cup of coffee or to make coin to coin trades, you are generating taxable capital gains and losses.

#2 MYTH

Since I am not using crypto for illegal activities, and I didn’t know the tax rules, the IRS will understand if I didn’t get my tax reporting right.

REALITY

In 2019, the IRS released a warning to crypto users: fix your reporting on cryptocurrency trades and transactions soon. Very soon, the IRS will crack down in this area! Keep in mind that the IRS first issued guidance on crypto tax in 2014. This means that US taxpayers can no longer claim ignorance—it’s time to get your taxes correct.

#3 MYTH

Crypto ownership is anonymous, so the IRS will never know.

REALITY

The IRS won court cases to gain access to information on the ownership of certain Bitcoin wallets. It is auditing the tax returns of those owners. The results of those audits will likely give the IRS more leverage to obtain further ownership information.

How We Can Help You

Let’s say you didn’t realize all the data collection and reporting you needed to do for tax purposes. Or you aren’t sure if you reported everything correctly on your tax returns. This is where we come in.

We can help you:

  • Identify taxable events and report them on your tax returns
  • Calculate cost basis and compute capital gains and losses
  • Figure out your foreign asset reporting requirements for cryptocurrencies held in virtual wallets outside the US
  • Identify ways to obtain acceptable valuations,
  • Understand and report the treatment of currency events, such as chain splits, airdrops, giveaways, token swaps, staking, mining, initial coin offerings (ICOs), like-kind exchanges, installment sales, and wash sales, to name a few.

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Tax Story of a Cryptocurrency Day Trader with Offshore Mining Operation

Our client, a US citizen, moved to Bulgaria to set up a cryptocurrency mining operation. He began as a sole proprietor but then changed his company to a controlled foreign corporation (CFC). He averaged about 10,000 transactions per month.

Every time he exchanged cryptocurrency; he was unknowingly creating taxable events. Unfortunately, he didn’t keep good transaction records, and most transactions never triggered 1099 forms to be issued.

When he heard about the Department of Justice’s summons from the Coinbase case, he called us for help.

Several key issues arose from this offshore mining operation:

  • As a US citizen and business owner in Bulgaria, there were issues of double taxation and foreign entity reporting requirements.
  • Since he had access to a lot of US wallets, his transactions were more easily discoverable by the IRS.
  • Since he had poor transaction records, we needed to find a way to recreate past transaction history to calculate the gains/losses for every transaction.

How We Helped This Client

We assisted this client by:

  • Providing education on the day trader threshold requirements to receive more favorable tax treatment moving forward.
  • Working with a custom software developer to recreate an extensive past transaction record so we could calculate gains/losses.
  • Getting his tax house in order by accurately reporting the transactions and timely filing all the necessary foreign asset reports.

This process was critical for two reasons:

  • The IRS is “cracking down” on crypto traders, and
  • Re-creation of transaction records can now serve as strong source information should it be needed in an IRS audit defense.

If you need help with preparing your tax return or suspect you’ve fallen out of compliance, don’t let this situation linger on. We can help get these tax headaches resolved.

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Tax Story of an Entrepreneur Who Funded a Start-up with Crypto

Our client is a US citizen who had a substantial amount of Bitcoin in his US wallet. He decided to move to South Africa and open a business. To start up quickly, he converted his Bitcoin into Monero (another cryptocurrency) and used this to buy materials and pay employees and contractors in multiple countries.

It seemed like a good plan on the surface. However, funding the start-up with cryptocurrency created several issues:

  • A US citizen transferring cryptocurrency to a foreign entity triggered the need to file Form 926, Return by a US Transferor of Property to a Foreign Corporation. Failing to do this can result in a $100,000 penalty.
  • At the time of converting the Bitcoin to Monero, this client needed to calculate a gain or loss.
  • Transfer pricing applied.
  • Mitigating double taxation became more difficult.

How We Helped This Client

We assisted this client by:

  • Calculating the gain and loss of all cryptocurrency transactions between the US S corporation and South African CFC.
  • Calculating the expenses (employment taxes, salary, etc.) in both South African Rand and USD.
  • Updating the profit/loss and balance sheet statements to reflect all cryptocurrency items.
  • Properly reporting the cryptocurrency foreign wallets on IRS Form 8938 and the FBAR.

If you need help preparing your tax return or getting back into tax compliance, we can help.

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Our Services

Cryptocurrency clients, both individuals and businesses, are some of our most valued clients. When you work with us, we’ll help you navigate the changing tax landscape.

We can help you with:

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.

Looking for a Nexia International Partner?

We’re an active member of Nexia International, a global network of independent accountancy, tax and business advisors with over 250 firms around the globe.

Meet our tax professionals

Mina Tsai

Mina Tsai

Tax Specialist
Pat Haas

Pat Haas

Senior Tax Specialist
Angela Eichenbrenner

Angela Eichenbrenner

Senior Tax Specialist
All Team Members

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What our clients say

“Very well done. The Wolf Group was especially receptive to dealing with my confusion and difficulty understanding the process and tax issues. Very helpful with my questions. Thank you very much.”

“The tax professionals I have worked with at The Wolf Group have been extraordinary. They have been clear, helpful, endlessly patient, hugely knowledgeable, and just amazing. The advice has been excellent, and the communication has been very clear. Subjects that feel so daunting have been explained with great clarity. I trust TWG completely and would not know how to manage without them.”

“As always, I have appreciated the quality of the advice and the rapid response to my questions.”