
Cryptocurrency has recently been introduced into the financial market and embraced with open arms. Nevertheless, its tax feature remains problematic and unclear to investors and businesses. With cryptocurrencies expanding their utility daily, the client needs the assistance of an accountant to explain their intricacies. Whether in trading, mining, staking, or recommending record-keeping and tax-planning strategies, accountants must guarantee clients’ compliance with tax laws. Changes are happening in cryptocurrency and taxes, and this article talks about the most important things an accountant in Charlotte, NC, should tell their customers.
Table of Contents
The Reasons Behind Cryptocurrency Taxification
Like stocks, bonds, and real estate, cryptocurrency is considered property by the Internal Revenue Service (IRS) and is taxable. Because of this categorization, any gain, sale, trade, or use of cryptocurrency—including buying, selling, or earning—can be considered a taxable event. For tax reasons, it is necessary to record any profits or losses, just as with conventional assets.
Cryptocurrency is a rising asset class, and governments are taxing it to ensure everyone pays their fair share. Regulatory agencies are working to provide transparent tax rules to bring cryptocurrency in line with current frameworks for investment income and capital gains.
What Should Accountants Advise Their Clients About Cryptocurrency and Taxes?
Cryptocurrency Is Taxable
Clients need to know that buying and selling cryptocurrencies is not beyond the taxman’s reach. In most jurisdictions, cryptocurrencies are considered properties, and thus, their trading attracts capital gains or capital losses. This includes situations when clients trade, sell, or pay for goods and services using cryptocurrencies, which are considered taxable.
Accountants must clarify the tax rates for short-term capital gains holding periods of less than one year and long-term holding periods of more than one year.
Relevance of record keeping
Cryptocurrency investor documentation is crucial. Accountants should advise clients to maintain records of:
- Purchase prices and dates.
- Prices or sales, dates of the sale, and the transaction fee.
It is useful in determining gains and losses and in preparing correct tax returns.
Reporting All Transactions
Actual and potential clients must inform the IRS of all transactions concerning cryptocurrencies, including unprofitable ones. Failure is subject to penalties and often leads to an audit. Anybody who gets paid in cryptocurrency has to recognize the value of cryptocurrency at the time of receipt as ordinary income.
Accountants should also explain to clients how staking, mining, and airdrops are taxable activities. Clients should adhere to their reporting obligations.
Consequence Concerning Taxation of Standard Practices
Accountants should educate clients on the tax consequences of various cryptocurrency activities, such as:
- Trading and exchanges which fall under capital gains or losses taxation.
- Purchases using cryptocurrency are treated as sales, whereby earnings or losses depend on the cryptocurrency’s price at the time of acquisition.
- Income is taxable based on the cryptocurrency’s fair market value when received.
Tax Planning Strategies
It is recommended that accountants should develop the right tax planning techniques that should be recommended to clients to reduce incidences of paying high taxes. This includes:
- Tax-loss harvesting: Some investors sell low-performing cryptocurrencies to use the cash to buy the performing ones.
- Gifting and donations: The possibility of claiming taxes on donating or gifting cryptocurrency.
- Holding periods: As to the type of advice they offered, it is worth noting that some of the firms recommended keeping assets for longer periods to take advantage of the preferential rates of taxation for long-term capital gains
Conclusion
Cryptocurrency taxation remains a fluid area of law that keeps both clients and accountants on their toes. Some strategies that can help clients, from an accountant’s accountant’s perspective, include explaining record-keeping, determining what is taxable, using cryptocurrency tax software, and strictly following the laws and regulations regarding reporting.