Over the Thanksgiving holiday, Bitcoin, Ripple and Ethereum, three major cryptocurrencies, took a big dip. Part of the reason for the crash was a large sell-off, but clients who have invested in cryptocurrency shouldn’t panic and sell their tokens -- let alone dumping them on Cyber Monday deals, no matter how tempting.
This year, accounting firms have been making moves in cryptocurrency, opening service lines for clients with crypto investments, or acquiring practices that provide cryptocurrency and blockchain services. A key service clients are turning to accounting firms for is advice on their investment, particularly regarding taxation.
While the most recent significant guidance on cryptocurrency from the IRS was issued in 2014, the agency is now keeping a close eye on cryptocurrency investments. The House Ways and Means Committee is none too pleased with this reality, and recently
Nonetheless, the crypto market continues to grow, both in size and interest from investors (the dollar value still fluctuates wildly for most cryptocurrencies). Jeff Brimhall and Seth Wilks of ProfitStance, a cryptocurrency consultation company, recently said in a blog post that as crypto participants buy and sell a wide range of coins, they are confronted with the need to track their “in” and “out” prices in order to accurately calculate their taxes – similar to standard taxation requirements to maintain an accurate cost basis for any and all investments, and transactions with those investments.
Adam Drury of the crypto blog Blocklr recently wrote, “Because the IRS treats your cryptocurrency assets like property, they're subject to capital gains taxes. This means that you pay taxes on the increase in the value of your cryptocurrency holdings. Yet, it's also possible for someone to receive cryptocurrency as a payment or wage from an employer or contractor. In that case, these cryptocurrency earnings are subject to standard income taxes.”
So, what a client does with their crypto investment in light of this dip in price could depend on how they received that crypto in the first place. If it was bought on the marketplace, their capital gains taxation will dip as well; and if the tokens were earned as wages, they should only be concerned about the risk entailed with keeping their tokens. Given that Bitcoin, for instance, rose to almost $20,000 per token in December 2017, then experienced a major crash in January, descending to $7,000 per token, but has been rising ever since (until Thanksgiving), it may be smart to just hold onto the tokens and ride out the volatility.
