Centralized cryptocurrency exchanges reached an all-time high in 2021 according to a report from The Block, which shows over $14 trillion in trading volume.
As coins like Bitcoin and Doge captivated and mystified individuals, there were some investors who went all-in on crypto in 2021.
"We have quite a few clients are not just dabbling, they're full on crypto," said Chris Powers, a partner and tax leader with Abdo, which has locations in Edina and Mankato. "So we need to know what's going on."
When it comes to tax time, cryptocurrency presents a few unique challenges in reporting gains and losses experienced throughout the year.
"The IRS wants to make sure individuals that own cryptocurrency are recording the transactions on their personal tax returns," Powers said. "Even if you use cryptocurrency to buy groceries, you need to record the transaction because you would have exchanged one property for another property. In the eyes of the IRS, you had a transaction which means you have to recognize the gain."
Powers adds that crypto should be treated like any other stock that someone purchases throughout the year.
"Keeping track of when you buy and sell it is important. Now we are always asking our clients if they do have it because it is more commonplace."
When it comes to virtual currencies, the Internal Revenue Service continues to publish information to assist tax payers in accurately documenting their transactions.
Power says the main reason the IRS is busy publishing that information is solely because of the different rules that may trip filers up.
"[Crypto] is more property based," she said. "Wash-sales, are not part of the deal when it comes to virtual currencies. There are some nuances to know about and it's important to work with a CPA who is educated."
2021 also saw the rise of non-fungible tokens (NFTs) which, unlike cryptocurrencies, cannot be traded or exchanged at equivalency.
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NFTs present a few hurdles for taxpayers as well.
"They could be taxed a little bit different," Powers said. "If you created the non-fungible toke, which those were put into place to be more of scarcity or specific item. If you created an NFT, it gets taxed at an ordinary rate. You could even be taxed at self employment because that's how the IRS looks at it."
Powers says those individuals investing in NFTs would look at whether or not its a short or long term gain.
"The key is get it on your tax return. The IRS wants you to be recognizing these. Don't miss out. It's an easy thing to do. Get it recorded."
On Tuesday, the IRS reported that crypto and NFTs were rife with "mountains of fraud" during a virtual event hosted by the USC Gould School of Law.
$3.5 billion worth of cryptocurrencies were seized in fiscal year 2021 by IRS investigators.
Another area where the IRS will be looking more closely at has to deal with a new rule that went into effect on Jan. 1 impacting payment apps like Venmo, CashApp, and PayPal.
According to the IRS, payment provider apps must issue users and the IRS a Form 1099-K if combined business transactions total more than $600 in a year. The move is a change from only issuing the form if someone had more than 200 business transactions in a year totaling more than $20,000.
"You have to print off the reports that are in the system for your transactions because we do not want to miss any of the deposits in where you are collecting money," Powers said. "That's particularly important for businesses at pop-up shows or small swap markets where people swipe a card and it potentially goes through a Venmo account. You do not want to miss out on that revenue because the IRS is looking for people who are not claiming all of their revenue."
More information about crypto, NFTs, or any new tax rules for 2022 can be found here.
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