Cryptocurrency & Tax Compliance: What You Need To Know

If you are one of the nearly 25% of Americans who own cryptocurrency, you might be wondering how to manage your tax returns in order to remain legally compliant. Because tax compliance, tax planning, and estate planning for cryptocurrency owners can be complicated, consulting with a Gilbert tax attorney is highly recommended.

The IRS continues to expand its cryptocurrency oversight and regulations, so it’s essential to work with a qualified tax professional who understands IRS guidelines. Some of the primary guidelines regarding cryptocurrency and taxation compliance are listed here.
A cryptocurrency owner planning his taxes

Cryptocurrency Transaction Income Tax Compliance

Avoid IRS scrutiny, audits, and penalties for noncompliance by verifying whether you qualify to pay taxes on your cryptocurrency transactions.

  • Any sale of cryptocurrency that was issued by a government or central bank is a taxable transaction.
  • Any trade of one type of cryptocurrency for another is a taxable transaction.
  • Using cryptocurrency to buy something or to pay for a service is a taxable transaction.
  • Receiving cryptocurrency due to a blockchain “hard fork,” from mining, or from staking are reportable. The taxation requirements for staking rewards are unclear at this time.

If you participated in any of these cryptocurrency transactions, you might need to increase your estimated tax payments. In most cases, you will need to file Form 8938 (Statement of Specified Foreign Financial Assets) and/or an FBAR (Report of Foreign Bank and Financial Accounts). Additionally, if more than $10,000 worth of cryptocurrency was used in a transaction, the owner may be subject to cash-receipts information-return reporting because virtual currencies and cryptocurrency will be included in the term “cash” after 2022.

Some types of cryptocurrency transactions are not taxable:

  • Purchasing cryptocurrency with currency issued by a government or central bank
  • Receiving a bona fide gift of cryptocurrency or giving a bona fide gift of cryptocurrency, unless the gift is large enough that gift tax must be paid
  • Charitable donations using cryptocurrency
  • Moving cryptocurrency from one digital wallet to another


Tax Planning For Investors, Miners, Traders & Dealers

Tax planning will vary depending upon your role in cryptocurrency, but your Chandler tax lawyer can help you navigate the regulations. Your attorney’s role in assuring your tax compliance may include:

  • Helping you gather data to determine payable taxes
  • Advising you on how to keep records of your cryptocurrency transactions
  • In some situations, advising you to hold cryptocurrency investments for at least one year to avoid short-term capital gains taxes
  • Providing advice on other cryptocurrency investments to offset capital losses
  • Advising you to invest in cryptocurrency with a traditional IRA or Roth IRA to avoid investment gains, although this may require some additional considerations
  • Assisting with the most tax-effective methods of sale
  • Advising on tax deferral in qualified opportunity zones
  • Advising avoidance of capital gains tax through charitable donations
  • Providing advice regarding mining and cryptocurrency payments

Whether you are a miner, investor, trader, or a dealer, it’s crucial to receive advice from a qualified source and be aware of the regulations that you will be subject to follow in order to avoid penalties for non-compliance.

Estate Planning For Cryptocurrency Owners

Cryptocurrency owners must give specific consideration regarding their estate planning.

  • Because cryptocurrency exchanges cannot name a beneficiary, a will or trust must provide for the disposition of the cryptocurrency.
  • Cryptocurrency can be lost forever without careful planning. The client must provide detailed instructions on how to access the account in order to avoid this loss, which is subject to escheat even if it is lost.
  • Escheat, which refers to unclaimed property laws, may also apply to cryptocurrencies. This makes estate planning especially important for cryptocurrency owners.
  • Special tax considerations may be needed if the value of the cryptocurrency will exceed the estate tax basic exclusion amount. For example, a bona fide gift may be a solution.


Arizona’s Leading Tax Attorney Is Ready To Provide Advice For Cryptocurrency Owners

Ensuring tax compliance and planning your estate can be complicated when you own cryptocurrency, but the attorneys at Silver Law, PLC are ready to provide trustworthy legal advice. Our attorneys have extensive experience in all forms of tax law, hold a comprehensive understanding of federal and state tax regulations, and are up to date on the latest developments regarding IRS taxation of virtual currency. Contact our office today to schedule your free, confidential consultation and learn more about how we can assist you.


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