Bitcoin and other forms of cryptocurrency, such as Litecoin and Ethereum, have been attracting increasing interest from individual investors and the media. As CPAs who are interested in tax and finance, we’re paying close attention, too.
Hertzbach advises taxpayers and prepares returns for cutting-edge investors who are trading in cryptocurrency. We’re staying up-to-date on related tax policy both for professional reasons and because it’s exciting. This is a whole new type of investment developing right now, as we watch. It could be a change as big as the development of the internet. Or it could be a repeat of Tulip Mania, the craze that drove the cost of tulip bulbs in Holland to unprecedented levels before crashing in 1637.
Though founders of virtual currency might see their creations as currency, the IRS sees them as investments, just like investing in Euros or Japanese Yen, or company stock. Investing in cryptocurrency is not a taxable event. Selling or trading it is.
We recently attended a seminar given by Leanne Fryer Broyles of Frost & Associates and Matt Costa, CPA and personal cryptocurrency enthusiast. They pointed out that the IRS guidance on cryptocurrency is limited so far to Notice 2014-21, a 6-page publication issued four years ago. They also offered advice we thought we’d pass on, along with some from our own experience:
- Track how much you are investing. This is the basis. When you sell or trade your cryptocurrency, you will have to pay taxes on the proceeds less the basis. Keeping track of basis ensures you can avoid paying taxes on the entire proceeds.
- Tell a trusted advisor where your key is. If anything happened to you and the key was inaccessible, your investment would be lost.
- Avoid over-investing. Remember Tulip Mania. Cryptocurrencies are very volatile. The general practice of diversifying investments applies even more in this situation. Don’t invest money you can’t afford to lose.
Always speak to appropriate advisors before investing. We are not providing investment advice.