One of the most recent headlines regarding cryptocurrency’s turbulent 2023 concerns a Securities and Exchange Commission case that is now pending against Coinbase. Investors should be aware of other concerns even if the SEC continues to crack down on practically every business or service provider that is focused on the cryptocurrency industry. Every business conversation includes taxes, and it’s rarely enjoyable to talk about taxes. Taxes are a crucial topic for every investment or company choice, whether they are enjoyable or not; crypto taxes and their treatment continue to be a source of lively discussion, debate, and wide-ranging commentary.
The Internal Revenue Service has regularly updated its advice, published numerous online Q&A materials, and altered tax forms for American taxpayers, but the tax position relating to cryptocurrencies is still difficult. From a tax viewpoint, simple crypto transactions like utilizing bitcoin (or another crypto) for transactional purposes are generally recognized, but that only makes up a small portion of the bigger picture. Staking, wrapped tokens, decentralized finance transactions, and non-fungible tokens are topics that are still the subject of heated discussion.
Due to the fact that they stand out from other cryptocurrencies and are linked to some external asset, whether it be virtual or tangible in form, NFTs are distinct from other cryptocurrencies. Investors and accounting experts alike need to stay up to date on these concerns in light of recent news that the IRS is thinking of modifying the tax treatment for NFTs, essentially taxing them all at the higher income tax rate rather than the lower capital gains rate.
Let’s look at some considerations that professionals should make while trying to assist customers during this tax season.
The IRS is serious about cryptocurrency. The notion that the crypto industry has not been taken seriously or treated on an equal basis with other asset classes has been a widespread and persistent criticism made against the IRS and other regulatory bodies. As seen by the IRS’s numerous remarks, revenue rulings, and other statements, it is obvious that crypto has advanced from a niche topic that solely interested technical experts to one that has unquestionably entered the mainstream.
In spite of the political commentary that still dominates the blockchain and cryptocurrency industries, both organizations and people are embracing blockchain-based payments. The usage of cryptocurrency or bitcoin for payroll purposes, daily use as a medium of exchange, or retail investors looking to diversify their holdings are some examples. Whatever the implementation looks like, it’s a fact that cryptocurrency usage and acceptance are growing, and regulatory bodies like the IRS are paying notice.
Cryptocurrency taxes are changing. Although the treatment of crypto assets from a tax perspective is fairly straightforward—crypto is treated as property and taxed whenever it is used in conjunction with an exchange or other transaction—the fast-moving nature of crypto also creates numerous situations where a blanket treatment is not applicable. NFTs have had a significant impact on the crypto industry and appear certain to do so in the future. Tax compliance and reporting must keep up with the growing acceptance of cryptocurrency by both individuals and institutions, notwithstanding the prolonged crypto winter that is exerting pressure on the industry.
It is inevitable that accounting and tax professionals will need to adapt as all types of crypto assets become more widely available. The fact that such proposals have been made suggests that the IRS prioritizes compliance and revenue generation, even if the proposed modification for NFTs is changed as a consequence of public criticism.
Tax professionals must be proactive. Taxes are inherently retroactive since people talk about and pay taxes on things that happened in the past. This seems unlikely to change because income cannot be taxed in advance, but that is no justification for accounting and tax experts to be disregarded during the decision-making process. NFTs are a distinct subset of cryptocurrency in and of themselves, and changing tax rates and criteria will only make the situation more difficult. Crypto taxes are already a complex and rapidly evolving area.
NFTs may have lost some of their prominence, but the tax debate surrounding them is still very active.
