As cryptocurrencies gain popularity, businesses must understand the tax implications of digital assets. Learn how cryptocurrency transactions are taxed and how businesses can stay compliant with tax regulations.
Introduction
With digital currency now a mainstream financial asset and businesses increasingly accepting the use and transacting of digital currency, cryptocurrencies have moved from niche investment to more mainstream. Bitcoin, Ethereum and other digital assets are no longer little-known niche things for some tech hipsters or investors, but part of daily operations for many businesses worldwide. However, since cryptocurrencies are gaining relevance, businesses must stay current on tax rationale behind these assets.
In this article, we will touch on the most important aspects of crypto taxation that businesses ought to know and guide you through the intricacies of crypto reporting and compliance in the dynamic crypto world.
1. Understanding Cryptocurrency as Property
If one uses a wallet for their cryptocurrency, the IRS views cryptocurrency to be property, not currency, for tax purposes. The classification of cryptocurrency assets has huge repercussions in terms of doing business on cryptocurrencies.
What’s New: Cryptocurrencies are taxed similarly to other forms of property, meaning that gains or losses from transactions involving digital assets are subject to capital gains tax. If a business collects payment with cryptocurrency (like BTC or ETH), the business must report the reasonable value of the cryptocurrency at the time of the transaction.
Why It Matters: Businesses who have been paid in digital currencies should be aware that how they deal with this can trigger tax liabilities. Just like any other gain from holding or selling cryptocurrency, businesses must track the value fluctuation in order to report accurately.
2. Taxation of Cryptocurrency Payments
Businesses who accept it as a mode of payment have to count in the white of digital assets. The IRS says that businesses must treat cryptocurrency payments as any other payment for goods or services.
What’s New: The IRS mandates that businesses report the value of cryptocurrency received as payment on their tax filings. Businesses should report their cryptocurrency holdings in U.S. dollars at the time of their transaction, and assuming that capital gains or capital losses are reported.
Why It Matters: Fail to report crypto payments accurately and you could be jeopardizing your tax compliance. If a person holds all cryptocurrency, which appreciates between the time of receipt and time of sale, such is taxed as a capital gain.
3. Mining and Staking: Reporting Cryptocurrency Income
Tax rules are specific as to how mined or staked coins are to be treated as income for those businesses engaged in the business of cryptocurrency mining or staking.
What’s New: The IRS considers any cryptocurrency received through mining or staking to be taxable income at the fair market value on the day it is received. Depending upon the nature of the business, this income is subject to self-employment taxes.
Why It Matters: Income from mining and staking can be substantial and businesses need to report that correctly to avoid penalties. Along with back taxes, interest charges could come on top of failure to report mined cryptocurrency as income.
How can businesses track cryptocurrency transactions effectively for tax reporting?
Businesses can keep involved with accounting software that integrates cryptocurrency transactions, keep detailed records of crypto transactions and seek citations from a professed tax advisor.
4. Cryptocurrency Losses: Deducting Capital Losses
Like it or not, businesses must report capital gains (and pay capital gains taxes) on cryptocurrency, and are allowed to deduct capital losses, which could lower taxable income.
What’s New: If a business sells cryptocurrency at a loss, it can offset other capital gains with the loss, potentially reducing its overall tax liability. To calculate what your gains and losses are, businesses need to know their cost basis for the cryptocurrency they are investing.
Why It Matters: Cryptocurrency transactions can cause losses that effectively reduce a business’s tax bill by being used to offset gains made in other areas. Proper record keeping is important in order to reduce losses in the correct manner.
5. Reporting Requirements for Cryptocurrency Transactions
More recently, the IRS has introduced more stringent reporting requirements for cryptocurrency transactions, and in order to comply, businesses absolutely need to keep careful records.
What’s New: Starting in 2024, businesses must report cryptocurrency transactions on Schedule 1 of their tax returns, providing more transparency to the IRS. Businesses are also required to report to the IRS if they have received, sold, or exchanged cryptocurrencies during the year.
Why It Matters: As the IRS increases its focus on digital asset transactions, businesses cannot afford to not report accurately, or they will be subject to penalties for noncompliance. This ranges from monitoring each and every cryptocurrency transaction to making full disclosure about them on tax filings.
6. Crypto-to-Crypto Transactions and Tax Implications
One of the more confusing parts of cryptocurrency taxation is when a company exchanges one crypto for another. Since capital gains or losses result from these transactions, businesses must report them.
What’s New: When a business exchanges one cryptocurrency for another (e.g., Bitcoin for Ethereum), the transaction is treated as a sale of property, triggering tax obligations. If this was the real currency, the business must report the value of the cryptocurrency received in exchange, determined at the reasonable value at the time of the transaction.
Why It Matters: However, crypto to crypto exchanges commonly lead to taxable events which businesses must be aware of. Calculating the capital gains or losses involved in such transactions and then filing returns accordingly is essential.
Conclusion
With the reality of cryptocurrency becoming an important aspect of today’s business operations, it is especially important to have the knowledge on tax implications to maintain compliance. With cryptocurrency being treated as property, mining income and crypto to crypto exchanges, businesses still need to know how to properly record transactions involving their digital assets.
We at Applied Accountancy specialize in crypto taxation for businesses. In the case that you are receiving cryptocurrency payments, mining digital assets, or simply doing crypto to crypto transactions, we have an expert team for advice, tailored to your business and stay compliant with taxes. Contact us today to find out how we can help you with your cryptocurrency tax reporting, and the rest of our tax services.
Applied Expertise: cryptocurrency, digital assets, tax implications, compliance, property, capital gains tax, IRS, mining, staking, taxable income, capital losses, reporting requirements, crypto exchanges, transaction tracking, accounting software, tax advisor, financial regulations, business operations, capital gains, record keeping
