CPA Practice Advisor

JUN 2018

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28 JUNE 2018 ■ www.CPAPracticeAdvisor.com THE TAX CHANNEL The Taxability of Cryptocurrency When Used in A Business By Dave DuVal, EA Now that the rush of tax season is in our rearview mirrors, and we've had an opportunity to see the morning sun after a good night's rest, it is time to start considering how we are going to tackle those extended returns where our clients utilized cryptocurrency in their small businesses. More and more businesses are accepting cryptocurrency as a form of payment. Additionally, new businesses are forming around the world of cryptocurrency such as bitcoin kiosks and cryptocurrency bill paying services. During February, some of our clients may have received notifications from Coinbase (one of the most popular U.S. based cryptocurrency exchanges), regarding their 2013-2015 returns. Complying with the "Notice of Narrowed Summons Request for Enforcement" from the IRS, on February 23, 2018, Coinbase issued notifications to approximately 13,000 taxpayers that the following information about their Coinbase accounts were forwarded to the IRS: name, SSN, date of birth, address, and most notably, their historical transaction records for the years 2013-2015. The taxpayers whose records were transferred to the IRS have one thing in common: at least one of their cryptocurrency transactions (whether it was a buy, sell, send or receive) was $20,000 or more during the aforementioned years. Along with the information the IRS receives from the Coinbase narrowed summons, the IRS is utilizing blockchain tracing and analysis software from Chainalysis. Given the IRS's enforcement actions and the continued rise in the use of cryptocurrency in small business, it's important tax practitioners understand the tax treatment fundamentals of this complex area. Although cryptocurrency is considered a convertible virtual currency (meaning it is interchangeable with fiat currency for buying and selling purposes), it is not considered legal tender. IRS Notice 2014-21 states that cryptocurrency is considered property for income tax purpose and not currency. All the general tax principles that apply to property transactions will apply to cryptocurrency transactions. For a cash basis taxpayer, each time he or she earns cryptocurrency through mining or providing goods or services, the U.S. fair market dollar value of the cryptocurrency earned must be recorded as of the date of receipt. This fair market value represents the reportable ordinary gross income subject to self-employment tax. Unless the taxpayer immediately exchanges the cryptocurrency earned, there may be an additional reportable gain or loss when the cryptocurrency is used to pay for the business's operating expenses or converted into U.S. dollars. If the fair market value of the property or service received in exchange for the cryptocurrency exceeds a taxpayer's adjusted basis in the cryptocurrency, the taxpayer has a reportable taxable gain. Conversely, a taxpayer will realize a loss if the fair market value of the property received is less than the adjusted basis of the cryptocurrency. Mining for bitcoins is considered a service and not property that is produced. When a taxpayer receives bitcoin for mining a block or confirming a transaction, the gross income will be equal to the fair market value in U.S. dollars at the date the cryptocurrency is received. LATEST TAX NEWS 6 Groups of Taxpayers Most Affected by Tax Reform. Those who heavily invest in fixed-assets have almost full write-off of depreciable assets. Before reform, these taxpayers had to depreciate the cost over five or 10 years. www.cpapracticeadvisor.com/12413224 More Time to Challenge IRS Levies. The tax reform law extended the time limit for filing an administrative claim and for bringing a suit for wrongful levy from nine months to two years. www.cpapracticeadvisor.com/12414303 SCOTUS Clears Way for Sports Gambling. Ruling is expected to bring a windfall in tax revenue to the states that set up legitimate gambling operations for their residents. www.cpapracticeadvisor.com/12412760 The IRS Has a 5-Year Plan to Help Taxpayers. The strategic plan, developed with input from external partners as well as IRS employees, focuses on six goals that will help improve customer service. www.cpapracticeadvisor.com/12414344 The 3 Most Important Things to Know About Tax Reform. It's common knowledge that the TCJA has nearly doubled the standard deduction, however, the offset to this is that the personal exemptions enjoyed by taxpayers have now been set to zero. www.cpapracticeadvisor.com/12413892 THIS MONTH'S TOP TAX SOCIAL MEDIA POSTS ■ New Scam Targets International Taxpayers. Taxing Subjects Blog. https://bit.ly/2xoTz3G ■ Digital Marketing & Your Tax Practice. Canopy Tax Blog. https://bit.ly/2AkjzxA ■ Debunking 4 Myths About Voluntary Disclosure Agreements. Avalara Blog. https://bit.ly/2sovioD ■ Lesson From the Tax Court: A Tax Truism. Bryan Camp, via TaxProf Blog. https://bit.ly/2H3EZxV ■ The Complicated Taxation of Retirement Accounts. Tax Foundation. https://bit.ly/2sqbEIO Continued online at www.CPAPracticeAdvisor.com/12412438

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