Accounting for Cryptocurrency: Navigating Evolving Regulations to Keep Compliant

stack of bitcoin and a mobile phone showing cryptocurrency investing on the Binance app
7-minute read

According to Treasury estimates, the 2019 financial year saw a tax gap of $600 billionThis is expected to rise to $7 trillion during the next ten years if left unaddressed. 

One of the tasks of the Biden administration is to combat this growing tax gap.

Cryptocurrency gains have come under the spotlight, thanks to non-reporting from crypto holders. Data shows that in 2018 only 0.04% of U.S. tax filers reported their cryptocurrency gains to the IRS.

Accounting for cryptocurrency gains has never been easy. This is one of the reasons why so many crypto investors fail to report their earnings and losses. 

With changing crypto regulations on the horizon, cryptocurrency accounting is only likely to get more complex.

However, it's crucial that you stay compliant and keep up with evolving tax requirements. Continue reading to find out everything you need to know about Biden's imminent new rules for cryptocurrency.

How Crypto Is Currently Taxed

To help you get to grips with the new cryptocurrency regulations, let's quickly run over how crypto is currently taxed. 

Cryptocurrencies are currently categorized by the IRS as property. Therefore, it is subject to capital gains tax.

Like other asset classes, crypto-assets sold within one year attract short-term capital gains or losses. Cryptocurrencies sold after more than a year's holding period attract long-term capital gains. These are taxed at the current rates for short- and long-term capital gains. 

Take note, these capital gains (or losses) are realized on any type of crypto asset sale.

For instance, say you buy some bitcoin with cash. Then, you convert some of your bitcoin into dodge coin, and finally, shift some of your dodge coin holdings into Ethereum. All of these transactions are taxable events. 

What's more, every time you pay for something using crypto, this too is taxable. The reason for this is that when you purchase something using a cryptocurrency, you are essentially "selling" your asset.

For instance, let's say you used some of that bitcoin you bought to pay for a coffee. The coffee costs 0,00015, or $6. However, when you bought the BTC, the price was down and you paid only half of what it's worth now. 

By buying the coffee, you are realizing 100% gain. In the eyes of the IRS, you are effectively selling $6 worth of your BTC investment that you bought for $3, which means you are realizing a $3 profit. 

Therefore, you also need to work out the associated "profit" (or loss) on any purchases you make using crypto. 

Because of this, accounting for cryptocurrency can get very complex. 

What’s Changing

As mentioned above, the Biden administration is aiming to narrow the tax gap and crackdown on tax evasion.

The new proposal stipulates that businesses and individuals will need to report any crypto transaction larger than $10,000 to the IRS. What's more, there are mentions that the IRS will have a heightened ability to monitor cryptocurrencies and crypto asset exchange accounts, and payment service accounts. 

Although this might sound dire, overall it could be beneficial to crypto assets as a whole. These measures might create headline waves in the short term. However, over the long term, they could add additional legitimacy to crypto investing. 

Besides implementing more controls, Biden's proposal also suggests raising capital gains tax.

The proposal seeks to raise the tax rate on capital gains from 20% to 39.6% for Americans earning over $1 million per year. This is a steep hike and is almost double that of the current rate.

This part of the proposal isn't aimed at cryptocurrency holders particularly. However, because cryptocurrency falls under capital gains tax, crypto holders earning more than $1 million will be affected. 

Overall, these changes don't change most aspects of accounting for cryptocurrency gains. The basic crypto rules around taxation remain the same. However, you may need to do extra reporting for large transactions, and pay a higher rate of capital gains tax if your yearly income is over $1 million. 

How to Stay Compliant With the Evolving Cryptocurrency Regulations

Thanks to Biden's drive to close the tax gap, it's pretty much a given that the IRS will be clamping increasingly on nonpayment of crypto taxes. 

Because of this, it's essential that you make double sure you are reporting all your trades and crypto investments. However, as we said earlier, accounting for cryptocurrency can be very complex and time-consuming. 

Are you still manually calculating the capital gain or loss on every trade or purchase you make with crypto? If so, there's a big chance that you will make a mistake somewhere. Unless you keep meticulous book of your buys and sells, it can be almost impossible to manually calculate the profit or loss on trades done in the past. 

Because of this, many traders nowadays utilize crypto tax calculation software. This minimizes errors and ensures you're doing correct crypto investment accounting.

Besides investing in the right crypto tax solution, you should also hire a competent cryptocurrency accounting agency that specializes in cryptocurrency taxes. This will help you stay compliant, and it will also give you access to smart tax planning.

Additionally, make sure that the crypto tax reporting software you choose is reliable. As well as comprehensive, IRS compliant, and able to link to numerous exchanges, including DeFi platforms. 

Do You Need Help Accounting for Cryptocurrency?

Biden's proposal isn't sparking major changes in practices around accounting for cryptocurrency. However, it does mean that all crypto investors need to be extra vigilant about reporting their profits correctly. 

As you might know, cryptocurrency accounting can be extremely time-consuming and confusing. Every little trade needs to be included. What's more, the nature of crypto trading can make it very hard to go back in time to work out the exact capital gain or loss you realized.

Does this sound like a nightmare? We think so too.

With our cryptocurrency accounting software solution you can streamline your crypto record-keeping process. Making it as automated and painless as possible.

Wondering how it works? We use your cryptocurrency trade history to automatically generate Form 8949 to be included with your tax return.

Our software connects with over 40 online exchange platforms. It is also built to be able to track DeFi trades, facilitate tax-loss harvesting, and provide multi-exchange reporting.

Want to learn more? Schedule a meeting today and we will be happy to answer any questions you might have. 

Share this post