Cryptocurrency and other digital assets such as nonfungible tokens often feel like an unexplored universe, where the laws of nature haven’t yet been discovered. Where the system that is being developed, and the rules that will govern, have the potential to upend the current economic structure. As that monumental shift continues to grow, and current rules, such as existing tax law, are being applied to digital assets, certified public accountants, tax attorneys, and enrolled agents are acquiring the skills and experience necessary to assist cryptocurrency holders with their tax compliance requirements. Some advisors are even navigating the sparse but developing IRS rules and notices to provide planning advice and tax management strategies. While it is key to have knowledgeable advisors helping you manage your tax responsibility, it is also helpful for the cryptocurrency owners and investors themselves to have a basic understanding of the following ways in which their cryptocurrency transactions may generate a tax bill.
The federal government currently considers cryptocurrency to be a form of property, rather than currency. As a result, certain transactions, such as making a payment using cryptocurrency or exchanging one type of cryptocurrency for another, might actually generate an income tax liability. Some potential income recognition events include the following:
Receiving cryptocurrency as payment for goods or services: A recipient is taxed on the value of the crypto that such recipient receives as payment for selling goods or performing services. The taxable amount is based on the value of the coin at the time it is received. Cryptocurrency values continue to fluctuate dramatically, so it’s possible that by the time the recipient’s tax payment is due, the coin has decreased in value to where it’s worth less than the tax that’s due on it. It is therefore important to set aside sufficient cash in US dollars to pay income tax on cryptocurrency that is received as payment for goods or services. In addition to being subject to income tax, the value of the coin received as payment may be subject to self-employment tax if the payment is connected to a trade or business.
In late September, Treasury issued its Small Entity Compliance Guide through its Financial Crimes Enforcement Network, a document that is 50 pages in length and sets forth detailed guidance about the new FinCEN “beneficial ownership” reporting requirements. And on September 27th, Treasury issued proposed regulations that delay required reporting for “reporting companies” that are formed on or after January 1, 2024, and before January 1, 2025, from 30 days after formation to 90 days after formation. A reporting company in existence prior to January 1, 2024, is not subject to the reporting requirements until the end of 2024. (Note that no reports will be accepted prior to January 1, 2024, and forms have yet to be published for purposes of reporting.)
There is a long list of “narrow” exceptions to the reporting requirement that generally relate to entities for which the government already has information as to beneficial ownership, such as a “securities reporting issuer,” an “insurance company,” a “broker or dealer in securities,” etc. So what is a reporting company? Generally, subject to the above exceptions, it is (1) a newly formed corporation, LLC or partnership created by filing a document with a secretary of state or other similar office, or (2)(i) an existing “small business” that employs 20 or fewer persons or has reported gross receipts or sales of $5,000,000 or less on its prior year’s federal income tax return, and is (ii) a corporation, LLC or partnership created by filing a document with a secretary of state or similar office. (There also are filing requirements for certain “foreign companies.”) Essentially, the reporting requirements entail disclosure of any person who exercises “substantial control” over a reporting company or who owns or controls at least 25% of the ownership interests of a reporting company.
The Seventh Circuit issued its long-awaited decision in Hoops, LP v. Commissioner, Docket No. 22-2012 (7th Cir. Aug. 10, 2023), in which it held that a partnership could not deduct deferred compensation due under a non-qualified deferred compensation plan to two NBA players when the deferred compensation liability was assumed by the purchaser of the Memphis Grizzlies NBA basketball team. This result means that the seller’s amount realized on the sale includes the amount of the liability assumption, yet the seller is not entitled to a deduction for the deferred compensation at the time of the sale. At this Fall’s Forum programs, we will be discussing this important case and how to structure a sale of a business where the buyer is assuming a non-qualified deferred compensation liability to avoid this whipsaw.
Registration Is In Full Swing For Our 2023 Tax Forum programs.
Capacity is limited for our in-person programs in Las Vegas and Orlando. Register Now before registrations and rooms fill up.
For those of your who prefer the comfort of your own home/office, please join us for any of the 14 virtual Forum and Fundamentals programs… the first of which kicks-off in two months on October 17th.
We look forward to seeing you… either in person or remotely… very soon!
In the meantime, we are always happy to address your questions related to any passthrough or closely held business matter that comes up in your practice. Please do not hesitate to call us at 800-286-4760 or email either of us.
Share this update with your peers.
Please forward this email to colleagues. They can subscribe to our updates on the Tax Forum website