But the vast majority of people involved in virtual currency are not miners. Instead, most people involved are purchasing cryptocurrency, such as Bitcoin, Ethereum, Tether, Cardano. And I can guarantee that you have some clients who are involved in cryptocurrency. And ignoring their investment or not asking the right questions is not the answer.
So what are the basic tax consequences of receiving cryptocurrency? The first comments by the IRS in this space came through, where they acknowledge the use of virtual currency. The IRS clearly states that for federal tax purposes, virtual currency is treated as property. The IRS also provided that general tax principles applicable to property transactions should also apply to virtual currency. So when your client tells you they acquired some Ethereum, think of it as though they bought property.
An exchange of one virtual currency for another, a crypto-to-crypto exchange, is considered a taxable eventA taxpayer that disposes of virtual currency will recognize a capital gain or loss that is either short-term or long-term depending on the holding period of the virtual currency disposed. The gain recognized is determined by subtracting the basis of the virtual currency being exchanged from the amount realized.
What if your client has hundreds, if not thousands, of cryptocurrency transactions? Don’t go it alone. There are a variety of tools out there that can allow taxpayers to link their wallets and produce the gains and losses associated with their transactions for the year. These services will even allow the taxpayer to toggle between HIFO, LIFO, and FIFO to see what gains or losses would be created under each method. Popular software in this space includes CoinTracker and Koinly.
NFT’s are also being utilized in the gaming space, where a significant amount of growth is expected to occur. These so-called play-to earn games have seen a massive boom in the middle of the pandemic because of so many lockdowns. NFT’s are used as digital items inside video games, and include boxers, weapons, cosmetic skins and other in-game items owned by specific persons. Inspired by Pokémon, the Axie infinity NFT game allows players to battle, collect and build a kingdom for their pets.
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