4 Post-Tax Day Considerations for Cryptocurrency

Even as the due date for American tax filing and reporting recedes into the rearview mirror, there are still several open items and areas of ambiguity that remain unaddressed. Particularly as the volatility in the broader cryptoasset sectors continues to express itself on a routine basis – highlighted in a dramatic manner by the recent large price swings – there are bound to be any number of tax issues linked to trading, holding and investing in cryptoassets. Adding to this, and further complicating matters, are the new blockchain-based applications that have moved rapidly from fringe topics to mainstream financial markets conversations.

In other words, on top of the existing tax issues and ambiguities that have continued to complicate tax preparation for crypto clients, there are even more advanced and differentiated options that can further complicate matters.

Let’s take a look at some of the open items and considerations that tax preparers and practitioners need to keep in mind, even after Tax Day, for tax planning, preparation and advising moving forward.

Enforcement is on the rise. Crypto makes headlines for any number of reasons, usually for price volatility reasons, and these price swings have not escaped the attention of regulators and policymakers. Specifically, the Internal Revenue Service (IRS) has made crypto tax enforcement and collection a top priority and has taken several definitive steps to translate verbal commitments into policy actions. Whether it is the inclusion of a crypto transaction question on the front page of the 1040, issuing summonses to a number of different crypto trading platforms and exchanges, or hiring an increasing number of specialists in this area, the trend toward more proactive and prioritized enforcement is clear.

Mobile apps create headaches. One of the most-discussed financial market developments during 2020 was the acceleration and rise of mobile trading applications. No matter what platform was utilized (Robinhood led the way in terms of notoriety, trading volume and controversy), there were tax liabilities. Complicating this rise, however, has been the recent inclusion of crypto trading opportunities on such mobile applications. In and of itself this is neither good nor bad, but when combined with the lack of sophisticated or accredited investors utilizing these platforms, this can lead to incomplete and inaccurate tax records and reporting.

Stablecoins are not always stable. Underlying the concept of a stablecoin is that it is possible to merge existing fiat currencies with some aspects of blockchain and cryptoasset technologies. For the most part, this promise has been fulfilled by some of the largest stablecoins in the marketplace, with the market leader – Tether and the USDT – recently reaching a market capitalization of nearly $60 billion. That said, and even though stablecoins have been developed and marketed as a stable medium of exchange, this does not exclude stablecoins from two potential issues. Firstly, stablecoins are still treated as property by the IRS, so every transaction potentially creates a tax obligation as well as reporting obligations. Secondly, and depending on what additional functionality is integrated with the stablecoin (more on that in the next point), there might be additional tax issues that will arise.

Advanced applications.  As if the above listed issues were not enough to give tax planners and preparers headaches throughout 2021, there is an entirely new ecosystem of blockchain and cryptoasset applications that came to the forefront during 2020. Decentralized finance (DeFi), in all of its many iterations, non-fungible tokens (NFTs), and the tokenization of physical assets all represent significant steps in blockchain development and potential adoption. That said, all of these also represent potential tax obligations for creators, purchasers and investors, including those that are underpinned and supported by stablecoins. For example, one of the primary upsides of DeFi applications is the opportunity to generate and earn income in the form of various cryptoassets. But, how are these cryptoasset earnings supposed to be tracked, treated and reported?

Cryptoasset taxes and tax reporting are by no means simple or straightforward issues, and that does not look like it is going to change anytime soon. While this does present a challenge for tax practitioners and preparers, it also creates opportunities for proactive and forward-looking individuals and organizations. Even with some of the recent volatility and debate around the future of certain specific cryptocurrencies and crypto trends, the underlying pivot toward greater crypto integration certainly does seem to be clear. Tax Day may have come and gone, but tax professionals need to keep learning about, discussing and preparing for the new and multifaceted crypto tax issues sure to come in the near future.