Navigating the Tax Implications of Cryptocurrency and Blockchain Technology
While it has been nearly 10 years since bitcoin burst onto the world stage as the first cryptocurrency and blockchain-based technology protocol, we have since seen an incredible acceleration of innovation in what is now referred to as distributed ledger technology (DLT).
But with accelerated innovation comes disruptive impact. From the 1,500+ decentralized applications built on top of Ethereum’s platform, to Zilliqa’s implementation of the first public blockchain that scales to transaction speeds that rival Visa’s payment network, the wide range of DLT-based applications and protocols currently in development have the potential to disrupt nearly every industry they touch. Given the disruptive capability of this technology, nearly six out of 10 large enterprises are seeking to deploy this technology to capture the competitive advantage.
As enterprises and individuals invest more time and capital in digital services and cryptocurrency assets, it’s no surprise that many need help navigating the tax implications of these transformative technologies.
CLA’s Future Innovation Team (FIT) was formed to keep CLA on the cutting edge of technologies that impact clients, consumers, and businesses. To help clients confront the surge of cryptocurrencies and blockchain technology, FIT has mobilized a team of professionals to help clients identify and address tax and accounting challenges that accompany this disruptive technology.
“We are seeing an unprecedented groundswell in new and existing companies entering this ecosystem, and the businesses and organizations that are evaluating use cases for utilizing blockchain technology to significantly improve productivity,” James Watson, Managing Principal and FIT Member
Cryptocurrency tax and accounting compliance
On March 23, 2018, the IRS issued a news release to remind taxpayers that income from virtual currency transactions is reportable. In the new release, the IRS acknowledges “transactions in virtual currencies can be difficult to trace.” For this reason, the IRS highlights that taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited and when appropriate held liable for penalties and interest. The IRS also points out that in certain situations taxpayers could be subject to criminal prosecution.
The IRS also reminds taxpayers that virtual currency is treated as property. This is consistent with the position taken in Notice 2014-21: General tax principles that apply to property transactions also apply to virtual currency transactions which means, among other things, “the character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.”
Unfortunately, the notice fails to address the complexity of cryptocurrency transactions. For example:
- How are tokens received via hard forks and airdrops taxed?
- Are crypto-to-crypto transactions subject to 1031 like-kind exchange treatment?
- How are initial coin offering (ICO) transactions treated for tax purposes, both by the investor and the developer?
With limited guidance from the IRS, our team has worked closely with individual and corporate clients to tackle the tax complexities of cryptocurrency. More importantly, CLA has gone beyond simple compliance to help both individual crypto-investors and tech startup founders plan for the tax and accounting issues they may encounter when looking to raise funds via their own ICO.
Beyond the tax implications, numerous business clients have engaged CLA to provide accounting and financial reporting support as it relates to cryptocurrency-based transactions. Our outsourcing team has delivered a wide range of services for companies operating in this space. From the strategy-focused outsourced CFO for a large-scale cryptocurrency mining operation, to the day-to-day bookkeeper for a small blockchain tech startup, our outsourcing team has delivered services that scaled to the needs of each client.
CLA’s industry engagement
As a firm, CLA has invested in resources that allow our professionals to stay in touch with the developments in blockchain technology and cryptocurrencies. In March, our firm began collaborating with the Wall Street Blockchain Alliance (WSBA) as a corporate member. A leading nonprofit trade association, the WSBA promotes the adoption of DLT across financial markets. CLA actively participates and collaborates on WSBA’s working groups to educate the public on the full breadth of capabilities of blockchain and cryptocurrency assets.
CLA has also been actively engaging the broader business community and accounting profession as a thought leader in the industry. Team members like James Watson regularly speak to industry groups on the disruptive capability of blockchain technology. CLA is fortunate to have other team members like Chris Hesse, a principal in our firm’s national tax office and current vice chair of the AICPA’s Tax Executive Committee, actively participating in the AICPA working group for cryptocurrency taxation.
Connect with our team of professionals
Our team includes individuals who share your passion for cryptocurrency assets and blockchain technology. Whether you are an executive seeking to understand how blockchain technology could affect your business or a long-term bitcoin “hodler” searching for a tax professional who speaks your language, CLA can help you assess cryptocurrency tax scenarios, weigh the risks, and consider possible tax treatments. Contact us to discuss your specific tax situation.