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A federal district court has greenlighted a John Doe summons to help the IRS fight crypto-related tax fraud. The authorization could help the U.S. government find thousands of tax cheats.
The Internal Revenue Service has received another thumbs-up from a federal court in the agency’s new passion to root out cryptocurrency tax fraud.
The U.S. District Court in the Central District of California authorized the IRS to serve a John Doe summons on Los Angeles-based OX Labs Inc., d/b/a SFOX and its subsidiaries. SFOX is a cryptocurrency prime dealer for professional traders and institutional investors and has more than 175,000 registered users.
The IRS wants information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in crypto between 2016 and 2021 with or through SFOX.
Welcome. I am Olivier Wagner from 1040 Abroad and will provide an overview of taxation of cryptocurrency, Non-Fungible Tokens (NFTs), and Decentralized Finance
First disclaimer: While cryptocurrencies and NFTs have been gaining traction, these are an extremely volatile asset class.
Likewise, it’s an ever-changing environment, so please contact me before taking anything here as true as it may have changed.
Let’s start with a review of blockchain and the building block that lead us to where we are today.
We have building blocks:
– Smart Contracts
DOL Releases Warning on Cryptocurrency in 401(k)s. On April 11, 2022 William Byrnes Posted This Message Under Tax Notes Intelligence
The Department of Labor (DOL) issued a compliance assistance release that warns retirement plan fiduciaries about allowing participants to invest in either cryptocurrencies or products that are related to cryptocurrency. The guidance comes in response to President Biden’s executive order that directed agencies to study the risks and benefits of cryptocurrency. The DOL release warned that in the eyes of the DOL, cryptocurrency poses significant risks and challenges for participants, including the risk of fraud, theft and loss. The release is clear that plan fiduciaries who allow cryptocurrency investment options should expect to be questioned about how those decisions could comply with their duties of prudence and loyalty. Plan fiduciaries should pay close attention and carefully evaluate whether allowing crypto-related products in their investment lineup is worth the risk, given the DOL’s sweeping statements and indication that it will presume that a fiduciary who offers cryptocurrency products has acted imprudently.
For more information on the current DOL fiduciary standard and new prohibited transaction exemption, Read More.
Have a question? Contact William Byrnes.
Crypto mining has been extremely profitable over the last few years, with Bitcoin miners making an estimated $15 billion of revenue and several mining companies going public in 2021. Miners are critical to preventing the “double-spend” problem in decentralized cryptocurrency networks such as Bitcoin. They validate and add blocks of transactions to the blockchain ledger by competing with other miners to solve complex mathematical problems and receive crypto tokens as a reward for their mining activities.
Unsurprisingly, crypto mining profits have caught the attention of the IRS, which has taken an increasingly aggressive approach over the last few years to auditing and taxing mining activities. Given this increased enforcement, tax practitioners and their clients alike have explored ways to minimize mining profits by performing mining activities through tax-advantageous vehicles such as IRAs and 401(k) accounts.
New IRS guidance has confirmed that pre-2018 exchanges of Bitcoin, Ether and Litecoin do not qualify for Section 1031 exchange treatment. Prior to 2018, taxpayers were permitted to defer capital gains taxes under Section 1031 for certain exchanges of personal property (1031 is now limited only to exchanges of real property). The IRS’s rationale is that these were not exchanges of like-kind property and so were taxable even prior to tax reform. The IRS found that Bitcoin and Ether each had special roles in cryptocurrency trading because if taxpayers wanted to trade in other types of virtual currency, they had to first exchange the other currency into or from Bitcoin or Ether. Therefore, exchanges between Litecoin and Bitcoin/Ether did not qualify as “like kind”.
2021 was an incredible year for crypto investors. Tokens such as Polygon ($MATIC), Sandbox ($SAND), Decentraland ($MANA) had incredible gains, with investors realizing returns in excess of 100% of their original investment. Yet, investors may be looking at a hefty tax bill for 2021, if they failed to plan accordingly.
Crypto investors were not the only category of persons to proser. 2021 was also a great year…for crypto-scams. Epic failures such as Squid Game ($SQUID) literally wiped millions of dollars, generating substantial losses to thousands of investors. Launched on October 26, SQUID went from a $0.01 to a peak of $2,862 in a week, before falling to $0.00 after the developers performed what is commonly known as a “rug pull” (meaning that the developers abandon the project by selling their tokens and taking the investors’ money – hence “pulling the rug out” under the investors’ money). In these cases, the investors holding the tokens sustain giant losses without further possibility of recovery.