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I have a client who was paid with etherium/crypto for a service. This is my first time working with crypto in general. I've indicated on the 1040 that they have digital currency. I have set up his Schedule C with his total income (which happens to be all from crypto). I have completed his Schedule as usual, but now, my question comes into the "cashing in" of the crypto. I'm guessing this must also be reported on the Schedule D form/8949, correct? If so, how is this not double taxation?
The client did not receive a 1099-NEC from the contractor for his service or a 1099-B for the "sale" of his crypto.
Finally, do I have to prepare anything else for the crypto currency assets? I thought I read something about the gift tax return, but that doesn't seem right.
I apologize; I'm new to the crypto thing.
Thanks for your advice in advance.
Devera
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1) No harm in declining this engagement and letting them find someone with more experience. In my experience these things can get messy pretty quickly if there are a lot of transactions. I have no problem leaving these messes to the "next gen" accountants (are there any next gen accountants? I think we're a profession that's slowly dying of old age and stress.)
2) When he's paid, the crypto has a value in USD based on the date/time of the transaction. That's the Sch C income and becomes the tax basis in the digital asset.
3) When he sells it, converts it, spends it, etc. that will trigger a capital gain/loss. It's not double taxed because it's not the gross amount that's subject to taxation at that point, just the difference between amount realized and cost basis (similar to a stock sale--except they don't take fractional shares of MSFT in exchange for coffee at SBUX!)
4) There are all sorts of rules for mining and forking and staking which may or may not apply depending on what else is happening.
Rick
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"The client did not receive a 1099-NEC from the contractor for his service or a 1099-B for the "sale" of his crypto."
That doesn't matter. If he made millions of $$ from private citizens and not working for any business, they wouldn't ever send him a 1099-NEC. It's just informational. That's not his reportable business income. He's supposed to report everything, even if not reported on 1099-NEC.
You have two separate activities. Being paid in money, crypto, or chickens, still is being paid for whatever the value you agreed upon with the customer. That's the business income.
The change in value in the crypto isn't a double taxation. It's no different than he takes a $5k car in trade for services, then sells it for $7k. That's a gain and has nothing to do with how he got the car. He has $5k basis in a car and sold it for $2k profit. That $2k is new money and has never been reported for taxes.
There is no double taxation.
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