Crypto tax time: Considerations for tax year 2020

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As 2021 continues to roll forward, there is no shortage of headlines and market stories for preparers and practitioners to monitor. Even though we lived through most of 2020 with COVID-19, it was actually a year without precedent. Even though the recently passed American Rescue Plan Act of 2021 added some complexity into the tax planning conversation, I know there are discussions among tax practitioners about issues connected to cryptoasset taxes. These issues are not only complicated, but also may actually end up being one of the major sticking points and issues for practitioners and clients during the 2020 filing season – and certainly will affect tax year 2021.

Obviously, no single article can comprehensively summarize the full scope of tax issues and considerations, but there are several integral questions and facts that need to be taken into account. Let’s get started.

Crypto is generally taxable. Something that has been said before, but needs to be said again, is that crypto gains do generate a taxable event. Given the 2020 bull run that coincided with the rise of trading apps that make trading simpler and more convenient, there will inevitably be taxpayers who do not realize that these gains generate taxable events. Being proactive and taking steps to figure out what – if any – crypto transactions were engaged in by the taxpayer, during the 2020 tax year, is an absolute must.

No de minimis exists. This is a point and concept that can be surprisingly difficult to convey correctly, and that is because of the efforts undertaken by the AICPA and others to address this issue. For crypto taxes and crypto tax reporting, there is no threshold, limit, or requirement that needs to be met to trigger full tax reporting obligations. In other words, if a client has taxable crypto of $10, $10,000, or $100,000, the reporting requirements are exactly the same.

Reporting is important. There is some confusion and ambiguity as to what exactly taxpayers need to report to the IRS with regard to crypto transactions and gains. During 2020, the IRS seemed to indicate that any transactions – purchases, sales, exchanges, or other transactions denominated in crypto – would need to be disclosed on the first page of Form 1040. During 2021, however, and after the 2020 filing season was already well underway, additional clarification and commentary was provided. It turns out that fiat-to-crypto, or buying crypto using USD, does not have to be disclosed. Given that this update was disclosed via the IRS FAQs page, preparers and practitioners should advise clients that: 1) this could change again, and 2) it may be prudent to play it safe in this case by still disclosing these purchases.

Stablecoins are taxable. While bitcoin has, and continues to attract, most of the headlines and market commentary, a newer entrant to the cryptocurrency marketplace has rapidly ascended in market capitalization and utilization. Stablecoins represent cryptocurrencies that are connected, stabilized, or otherwise connected to an underlying asset. In theory, this reduces the price volatility associated with these different instruments. Even though these cryptoassets might have lower volatility, the instruments and transactions that they are involved in are still going to be taxable. As payment providers such as PayPal, Visa, and Mastercard begin to offer, or at least enable, stablecoin-based transactions, taxpayers will have to be sure to disclose and report these transactions, as well as any associated gains/losses.

No 1099 obligation. As if the crypto taxation landscape was not complicated enough, something else that needs to be taken into account is that there are no definitive reporting obligations for crypto trading exchanges. It is true that many exchanges and platforms have begun to voluntarily disclose and report such information, but this is still not a legal requirement as of yet. Compounding this is the reality that some of the reporting that is provided may not be as helpful as reporting distributed from other equity trading exchanges. What all of this means is that taxpayers and preparers must be even more aware and diligent when it comes to gathering, compiling, and confirming the tax-related data that is provided.

Crypto-to-crypto is taxable. Even though treating crypto-to-crypto as a nontaxable event has been disallowed for several years, there is still some confusion around whether crypto-to-crypto transactions are taxable. They are. Like-kind treatment is not allowed for cryptocurrency transactions, even though – as per the IRS – cryptocurrencies are classified and treated as property. This is an especially important point to emphasize for the 2020 filing season, as the bull market for cryptoassets at large may have encouraged more crypto-to-crypto trades when compared to past years.

Differentiated forms are required. While the question regarding crypto transactions might be on the front page of Form 1040 for the 2020 tax filing season, this is not where crypto gains or losses are to be reported. Rather, these gains and losses should be reported on Form 8949, Sales and Other Disposition of Capital Assets, and should include the date of acquisition, date of sale, cost basis in these cryptoassets, and any associated gains/losses on these crypto transactions. In other words, accurately reporting crypto taxes on behalf of clients might be more complicated than it initially appears, which is where practitioners come in handy.

Crypto taxation is here to stay

Again, trying to summarize all of the issues and open items related to crypto taxation in one single piece is simply impossible. That said, the points and considerations mentioned in this piece should at least give practitioners an idea for some of the potential questions and items to take into account for the 2020 tax season. Taxes are an inevitable part of life, but being proactively informed on these issues can help make tax season a little less stressful.

Editor’s note: Access a Spanish-language version of this article.

4 responses to “Crypto tax time: Considerations for tax year 2020”

    • Hi Edward – There are many software tools that have come to market that enable crypto investors at all levels to accurately track and report both transactions and tax-related information.

  1. Are transaction fees, paid in crypto, deductible?
    Say you buy ETH at $1000 and sell at $2000 but didn’t quite double your money due to fees, is only the remaining gain taxable?
    And then, same question, but what if the fees were to move the asset onto or off of an exchange or wallet?

    • Hi Dan – great question. Assuming the taxpayer takes the standard deduction, any fees related to the purchase or sale of cryptocurrencies are either 1) added to the cost basis of the investment (if paid when purchasing), or 2) can be deducted from the gross proceeds realized on the transaction. Good luck!