Cryptocurrency Attorney

Virtual currency or cryptocurrency are among the newer and most talked-about forms of investment, which individuals or businesses can acquire through online exchanges or brokerage firms. However, the novelty of cryptocurrencies can make tax planning confusing and challenging for many new investors. Due to the evolving tax landscape surrounding cryptocurrencies, you can best protect your financial interests by working with a knowledgeable cryptocurrency lawyer.

Contact 453 Deferred Sales Trust Powered by Pennington Law today for an initial case review. Our professionals are here to discuss common cryptocurrency tax issues and potential strategies that may help minimize the tax liabilities from your cryptocurrency investments.

Why Choose Our Law Firm for Your Cryptocurrency Tax Matters?

Given the complexity of cryptocurrency tax, choosing an experienced blockchain lawyer can help you navigate changing tax laws governing cryptocurrency investments. Turn to 453 Deferred Sales Trust Powered by Pennington Law for your cryptocurrency tax matters because:

• Our firm offers an all-in-one service, including preparing tax filings and planning and implementing tax strategies to mitigate potential tax liabilities from cryptocurrency investments, such as trusts or reinvestment strategies. Unlike other firms that rely on outside professionals for various services, we have built a full-service, IRS-compliant program under a single roof.
• Firm principal Andre Pennington has extensive legal and financial experience as an attorney and tax professional, managing a law firm, tax practice, insurance company, and investment company. He also has an extensive background in helping clients with asset and financial protection.
• Andre has earned national recognition for his knowledge of cryptocurrency tax and legal strategies to protect assets and financial wealth.

How Does Cryptocurrency Get Taxed?

The IRS and state revenue agencies typically tax cryptocurrency when an owner sells their cryptocurrency on an exchange or through a private sale for cash. State and federal governments also typically tax cryptocurrency when a person “earns” a unit of cryptocurrency, whether by:

• Mining units of cryptocurrency;
• Receiving cryptocurrency as compensation for work, or
• Running a business that accepts cryptocurrency as payment for goods or services.

Are Cryptocurrency Gains Considered Taxable Income? How Do I Account for Them?

The IRS treats cryptocurrencies as property rather than currency. This affects how holders of cryptocurrencies have their holdings taxed, as no national government or central bank regulates cryptocurrencies as they do with traditional legal currencies. As a result, cryptocurrency gains taxation depends on the cryptocurrency’s value at the time the person acquired it.

A person who “earns” cryptocurrency through mining, compensation for work, or payment for goods or services may have to pay income tax based on the value of the cryptocurrency at the time the person received it.

However, if a person purchases cryptocurrency through an exchange or private sale, they do not have to pay taxes. Instead, a cryptocurrency holder only pays taxes on capital gains and losses when the holder sells their cryptocurrency. The IRS taxes capital gains upon the sale of cryptocurrency – capital gains represent the growth in value of an asset like cryptocurrency between the date the holder acquired the asset and the date they sold it.

For example, suppose a person acquires $1,000 of cryptocurrency and five years later sells that cryptocurrency for $50,000. In that case, they may have to pay capital gains tax on the $49,000 in gains in the value of the cryptocurrency.

The IRS taxes short- and long-term capital gains differently, classifying short-term capital gains as gains obtained by acquiring and selling an asset within 12 months. When a person holds onto an asset for over 12 months, their gains become long-term capital gains. The IRS taxes short-term capital gains like regular income and taxes long-term capital gains at zero, 15, or 20 percent of the gain, depending on the taxpayer’s income bracket.

Furthermore, taxation authorities consider taxpayers to have realized gains if they exchange their cryptocurrency for a more valuable asset. An example is when a taxpayer exchanges one type of cryptocurrency, such as Ethereum, for another form of cryptocurrency with a current value higher than the taxpayer’s basis in their Ethereum holdings.

People who receive cryptocurrency as a gift can “carry over” the donor’s basis in the cryptocurrency. Thus, suppose a donor acquires cryptocurrency for $20,000. If they later gift that cryptocurrency to a family member, the family member also has a $20,000 basis for capital gains tax purposes. However, cryptocurrency gifts whose value exceeds specific thresholds can trigger gift taxes.

Conversely, a person who receives cryptocurrency as an inheritance enjoys a “stepped-up” basis in the cryptocurrency — namely, the heir’s/beneficiary’s basis in the cryptocurrency becomes the value of the cryptocurrency on the date of the prior owner’s death.

Can I Write Off Cryptocurrency Losses on My Taxes?

As with other forms of investment, federal tax law allows taxpayers to deduct cryptocurrency losses when their virtual currency has declined in value since acquisition. A taxpayer seeking to write off cryptocurrency losses for tax purposes must first determine the nature of their loss. An example is whether the loss qualifies as a short-term or long-term loss or whether the taxpayer lost the cryptocurrency through other means, such as theft or the cryptocurrency becoming entirely worthless (not just significantly diminished in value).

In most cases, a loss on a cryptocurrency investment may entitle a taxpayer to set off capital gains realized in the same tax year or up to $3,000 in income in that tax year.

In Which Jurisdiction Must I File Tax Returns Related to Cryptocurrency?

Because the IRS treats cryptocurrency like property, taxpayers must report earnings paid through cryptocurrency or capital gains and losses realized from the sale of cryptocurrency on their federal tax returns.

Some state tax laws also impose taxes on income paid through cryptocurrency or capital gains and losses from the sale of cryptocurrency investments. Cryptocurrency earned as income for work or sales of goods and services may get taxed in the state where the taxpayer performed the work or sold the good/service.

A taxpayer may have to pay taxes on capital gains from cryptocurrency sales in the state of their residence, as they would for other common forms of investments like stocks or bonds.

How Does the IRS Audit Bitcoin and Other Cryptocurrency Investors?

Due to the complexities and uncertainty surrounding cryptocurrency tax, investors may make errors on their tax returns that trigger IRS or state revenue agency tax audits. When the IRS decides to audit a cryptocurrency investor, it will send a notification letter. Audits may occur via mail, with the taxpayer exchanging documents with the IRS, or in person, with the taxpayer (and their legal counsel) required to meet with an auditor (either at an IRS office or the taxpayer’s home or place of business) to review the taxpayer’s records and answer questions.

During an audit, the IRS will review various financial documents — such as bank statements, brokerage statements, credit card statements, crypto wallet records, and documentation of cryptocurrency transactions — to determine whether the taxpayer’s report income, gains, and losses align with the financial records. The IRS may also review blockchain histories to identify or verify cryptocurrency transactions.

When the IRS finds that a taxpayer has underreported income or gains from cryptocurrency, it may issue a deficiency notice imposing additional taxes, fines/penalties, interest, and fees.

Can I Appeal an Unfavorable Bitcoin Tax Determination from the IRS?

Taxpayers typically have 30 days after receiving an unfavorable tax decision from the IRS to appeal that determination when the notice of decision informs the taxpayer they have the right to appeal. You may have a valid basis to appeal if you believe the IRS made a mathematical or factual error or misapplied the law in determining your tax liability.