Cryptocurrency Accounting FAQ

We don’t have a favorite, but you can see a list here: Cryptocurrency Accounting Software.

It’s similar to your taxation of other physical assets. IRS considers your cryptocurrency property as a capital gain which is taxable. 

Any gains on your crypto-trading and crypto-transaction can be held accountable for taxation by IRS.

Three Things.

1 – Holding cryptocurrencies is considered equivalent to holding any physical asset.

2 – Any profits on crypto-trading are considered as capital gains which are taxable events in the eyes of IRS.

3 – Mining as a business can have added tax benefits and deductions if you set up an LLC

4 – Keep a close track of your crypto trading and to avoid penalties and overpaying, consult with a crypto CPA.

5 – Make sure you work with a CPA who specializes in crypto!

Cryptocurrency is taxed as a capital gain.

Say you bought a house and its price goes up after some time. The profit you made is capital gain. Cryptocurrency is considered the same.

If you bought Bitcoin and the value of that Bitcoin increased. This is also called capital gain.

Similar to physical asset or property, the capital gain on crypto is also taxable. You need need to report these taxations to IRS.

Here are some steps to follow:

1 – Connect all your wallets to a central repository coin tracking software

Remember that all exchanges are taxable events.

2 – Transfers from one wallet to another wallet is not a taxable event. Income from Staking to be Taxed at Ordinary Income Tax Rates.

Coins held for more than 1 year are eligible for preferential Long term capital gains rate.

3 – Set up a consultation with us immediately to identify your profit and loss for the year.

4 – Speak with a crypto CPA on Tax implications of going from Hobby trading to Business Trading.

They work similarly as with other crypto.

You have to keep track of your basis.

Erc2.0 coins trading is not a like kind exchange, its a coin to coin exchange which is a Taxable event.

If confused, consult with your CPA.

Yes, per IRS rules, if you convert one virtual currency to another, it’s a taxable event.

Eth and Weth are not the same Tokens. Even though the exchange is 1:1 in most cases.

If set up as an LLC, you should be able to deduct such fees.

Speak with your CPA on the best Tax structure for you, maybe it’s a LLC? 

For you to be able to compute the true profit and loss, all your wallet data needs to be examined.

Imagine a scenario where you provide data from one wallet and not the other, you could end up paying a whole lot more in taxes as such transfers from one visible wallet to a the non-visible wallet will consider each withdrawals as cashing out rather than transfer.

Speak with a crypto CPA on concerns about wallet data.

Crypto accounting is similar to that of a business.
The first step to do is to connect your wallets to a coin tracking software (example koinly or cointracking etc). You can see more of these here: Cryptocurrency Accounting Software List.

Since each crypto transaction is unique, this will ensure the cost basis of all your particular crypto lots are recorded.

Keep a close track of deposits and withdrawals.
You need to know what transactions make up income vs capital gains

Once all data is properly reconciled, then you can view your tax liability.

Consult with a crypto CPA on how to reduce your tax liability and what strategies could be applicable in your case.

Tokens that are held in your portfolio for more than a year are called Crypto Long Term Capital Gains.

After the 1 year window, the investor is eligible for preferential tax treatment via Long term Capital Gains. Cost basis and time are the key here.

Long term capital gains rates are 0%, 15% and 20% depending on your income. NFTs are to be treated differently than other crypto since NFTs could be considered as collectibles and have a different capital gains tax rate.

Consult with a crypto CPA on what your tax liability looks like if you end up selling or exchanging your coins.

Yes and No.

Yes, if you just conducted one transaction only.

No, if you conducted more than one transaction, including buying, selling, exchanging.

At every sell, withdraw and exchange, a taxable event occurs.

In most cases, you cannot just take the difference of your portfolio balance from start vs end and determine your Tax liability.Best to speak with a crypto CPA.

Tracking DeFi investments in various protocols can be very complex to manage due to the lack of visibility on the distributive ledger.

The same process is used for crypto reconciliation / accounting if invested in DeFi protocols or not. (I.E connect all wallets to a central repository to calculate profit and loss).

The IRS states that income earned is to be recognized as soon as you have received it.

The problem with these protocols is that lack of control of earned tokens/assets until they are “claimed” which is when the investor receives full control.

A lot of these investments are to be viewed on a case by case basis.

You must keep track of all your cost basis of each particular crypto transaction lot.

Crypto Ordinary Income is basically income you have earned. This is separate from appreciation of assets.
Ordinary income is from staking, similar to interest income.

Ordinary Income is from investing in DeFi protocols, when you are receiving coins for your Investment.

Once you have received income, for such coins, the FMV received is recorded as income and is the cost basis of such coins, if held for more than 1 year and then sold or exchanged will be eligible for preferential tax rates.

In the Crypto Capital Gain bucket, you have two pieces.

1. Short Term Capital Gains

2. Long Term Capital Gains

Short Term capital gains are taxed as Ordinary Income rates. Long Term Capital Gains rates are 0%, 15% and 20% depending on your income threshold.

Keep track of all cost basis and consult with a crypto CPA 

Two levels: Income at first, then a capital gain window starts.

Your cost basis would most likely be FMV (same as Income recorded).

You need to connect your wallet or ledger to a coin tracking software.

First you need to record all income. Then your capital gain window starts. Miners who are not incorporated will end up paying self-employment taxes on all their profits.

You need to know how to write off the hardware you bought using tools provided by IRS.

This one gets complicated and depends on your circumstances and setup. We’d recommend at the very least a consultation with a crypto CPA to set up your strategy.

Similar to how other miners are taxed. As soon as you receive your HNT, FMV of such HNT is your income.

Capital gain window starts post income recognition.
Cost basis are a major part in computing your profit and losses.

You need to know how to write off the hardware you bought using tools provided by IRS.

Again, this one really depends on the person and their setup. Speak to a crypto CPA, at the very least have a consultation.

You can follow these steps.

1 – Connect your wallets to a coin tracking software (example koinly or cointracking etc).

2 – Take a closer look at all deposits and withdrawals

3 – Differentiate between income vs capital gains

4 – Your cost basis are the key driving factor in all of this data reconciliation.

5 – Once all data is properly tagged and reconciled, then you can view your Tax liability.

6 – Consult with a CPA on how to reduce your Tax liability and what strategies could be applicable in your case.

Yes. The IRS categorizes hobbies as for fun and under a specific income threshold. However, when the activity becomes more frequent and profit becomes the main motive, then such crypto activity could potentially be considered a for-profit business activity. If you have a business (LLC, Corporation, etc.), you incur different tax burdens and can take advantage of deductions.

This could potentially subject part of your income to self-employment taxes. i.e… HIGHER Taxes. 

If you’re ready to make the move from hobby to business, definitely speak with a crypto CPA.

Each time you receive such payment, you need to record the FMV in USD at that particular time.

All payments to be reported on your Schedule C of your Tax return (assuming you are a contractor). If you’re a W2 employee, the forms will be different.

Crypto and income is complicated enough. Speak with your CPA for particulars to ensure you’re not missing forms or overpaying.

NFTs are unlike other crypto since they could be considered as antiques in the eyes of the IRS.

Do not mix your other crypto with NFTs. They are to be taxed differently.

Speak with a CPA on how to best mitigate this mistake.

You can claim such losses under personal casualty and theft.

This deduction is not a dollar for dollar and certain thresholds need to be met.

If you’re dealing with stolen or hacked crypto, you really need to speak with a crypto CPA. They can help you with deducting stolen crypto on your tax return, and help you mitigate audit risk. This is a stressful situation, so give us a call. We can help.

Most cryptocurrencies are considered property by the IRS, but each transaction is a unique lot.

The same way as investment in other Defi Protocols.

When you earn income from staking, such income is taxed at ordinary income tax rates.

See the detailed answer on DeFi protocol taxation for more info.

Of course, you can set up a LLC for practically any business purpose. You will need to file documents with your state in alignment with their requirements. But, first, talk to a crypto CPA. LLC is a great entity structure, but it might not be right for you. You could benefit from filing as a corporation.

Here is some important information:

1 – You need to ensure all personal and business matters are to be kept separate.

2 – LLCs are suppose to provide you with some sort of protection.

3 – We are not lawyers, and if you need legal consultation, we would advise you to speak with a lawyer.

4 – Incorporation can also help to lower your overall Tax burden, if Tax strategies are utilized properly.

You need an adequate tax structure if you’re a full time crypto trader.

In the current personal tax structure, your switch to business will mean you will need to pay self-employment taxes on your profits, and also that you should form a business entity for all your crypto spending and expenses.

You’ll also want to put together a solid process for crypto accounting and a good tax strategy. Self-employment taxes can add up!

That’s what crypto CPAs are for. We’ll consult on your specific situation and define the best tax structure for you.

This is a case by case basis and data is the key to building your case.

Speak with your CPA on how to handle your particular case and what relief might be available.