Receive expert guidance on navigating the tax implications and reporting requirements for your digital asset holdings.
“Timing can be everything when it comes to income taxes.”
The federal government is presenting a unified front to define cryptocurrency and digital assets as property, much like publicly traded securities, gold, and silver. The treatment of digital assets as property has several implications, including discouraging the use of an alternative form of payment. This treatment also impacts how digital assets are taxed.
As such, digital asset has some additional documentation requirements from an income tax standpoint, as well as unique features. Somerset Tax Partners, LLC assists clients with documenting transactions for mining activity, staking activity, trading activity, and exchanging digital assets for goods and services.
The cash equivalent value of coins and digital assets produced through mining activity is treated taxable income at the time the coin is produced. Then, the cash equivalent of the coin is also entered into bookkeeping as an asset, either as inventory or investments. Expenses associated with the mining activity may be deducted against income.
It is important to track staking rewards. From a tax standpoint, rewards are treated similarly to interest. However, as an asset, cryptocurrency is taxed as capital assets (i.e., capital gains tax rates). It is to your benefit to keep detailed records of staking rewards. While the cash equivalent of rewards is taxable income, the income amount forms your basis in the rewards. When the cryptocurrency along with the rewards are later sold, detailed transaction records of your basis help to reduce the potential capital gains tax. In other words, the higher your basis, the less capital gains tax there is to pay.
Cryptocurrency trades are taxed much like buying and selling stocks and bonds. The purchase price is your basis, and basis is subtracted from the sale price to calculate capital gains or loss. This treatment is true for both day trading and long-term investing.
Business taxpayers record the cash equivalent of digital assets as revenue, and then use bookkeeping to record the digital asset as an asset on hand. When the digital asset is later sold, the amount recorded as income is the basis, and capital gains tax is calculated on the difference between the sale price and basis.
We recommend detailed bookkeeping for digital assets, and we are ready and knowledgeable to assist with your bookkeeping needs for cryptocurrency transactions. Proper bookkeeping is your responsibility. Cryptocurrency and digital assets are decentralized. This means that there is no clearinghouse reporting transaction detail. The reporting falls on each taxpayer. While more brokers are required to track and report transaction detail, there are many instances in which transaction detail will only be known to you.
A: Cryptocurrency can be taxed either as ordinary income or as capital assets. Proper bookkeeping will determine the method of taxation which applies.
A: Record keeping includes minute-by-minute transaction detail and the cash equivalent value of each transaction. We assist our clients with organizing transactions for reporting on the tax return. In some cases, the broker will often provide transaction detail. However, you are responsible for record keeping of mining and staking activities. Even if the broker keeps a record of transactions, we recommend that you keep a detailed log for your own records, since digital assets by their nature are decentralized.
A: Keep a detailed ledger by minute coins produced in mining activities. It is also important to record the cash equivalent of each transaction. A detailed ledger should also be kept by minute for staking rewards along with the cash equivalent. However, do not include information which identifies the coin or wallet.
A: Document, document, document. With proper documentation, Somerset Tax Partners, LLC will prepare an income tax return which accurately reflects your digital asset activity.
A: Conversions to dollar equivalents generally result in capital gain/loss treatment. Digital assets are entered into bookkeeping systems as assets. A conversion is essentially treated as a sale, and the proceeds minus basis equal the amount subject to capital gains tax.