Cryptocurrency Tax Regulation & Compliance: Part 1

Cryptocurrency tax and regulation
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“Every year there is new stuff happening in the crypto space, and we have to figure out a way to fit it into the existing framework.” – Jason Tyra, CPA, PLLC

What can be sexier than crypto tax compliance and regulation? Okay, a lot. But for Jason M. Tyra, CPA, PLLC, it’s his job to help clients mitigate financial risk and maximize their return. When you find a resource with a vast knowledge base along with the ability to draw connections between areas of specialty to find the most optimal solution, then that in and of itself is sexy.

Jason Tyra, CPA, PLLC is a boutique multi-disciplinary professional services firm that offers a broad range of accounting, tax, and business consultancy services for entrepreneurs, small businesses, startups, and individuals.  Jason M. Tyra, CPA, PLLC is also a Texas law firm that provides representation before the IRS and other taxing agencies.

While located in Dallas, Texas, the firm has practice privileges in 48 out of the 50 states.  At the outset in 2013, Jason decided to distinguish his firm from more established firms by focusing on two areas of specialization: one of which is virtual and cryptocurrency taxation, regulation, and consultation.  Jason chose this area of specialty because he saw it as a very unserved offering. He still considers it vastly underserved, which for him works out well.

Jason Tyra, CPA, agreed to a feature interview with Gokhshtein Media.  The virtual conversation about cryptocurrency taxation and regulation covered these 4 topics:

Part 1: Top emerging trends in efforts to regulate crypto taxes.

Part 2: The biggest mistakes crypto users are making when it comes to reporting taxes.

Part 3: Top tips on record-keeping and tracking mechanisms and software.

Part 4: Measures the IRS is using to track crypto tax evaders.

Extras: Crypto successes and failures and a parting message

Due to the length of the interview and the vast amount of information Jason delivered, we will be sharing the conversation in a 4-part series.

So, if you have been involved in cryptocurrency trading or use it as a form of currency exchange transactions (buying and selling), and you’re wondering how to be prepared for the upcoming tax season, this 4-part series will get you off and running in the right direction.

Here is what he has to say about the evolving landscape of Crypto taxation – the top emerging trends in efforts to regulate crypto taxes.

HM: Tell us about your early experiences working with cryptocurrency with respect to taxation and regulation.

JT:  Early on there was a lot of ambiguity about how this asset class is going to be treated.  However, we decided that it would be treated in a way that other comparable assets are treated.  So, for example, it’s a capital asset in the hands of an individual – that’s always what we recommended.  I’m proud to say that nothing we ever filed nor any advice we ever provided to a client had to be retracted or amended at a later time when the IRS created new guidance.

HM: How did you get up to speed with what’s happening in the crypto space?

JT: It basically involved considering what people were doing in this space, that is, the use cases for crypto and the kinds of returns people could earn from crypto which has evolved over time. 

At first, it was small-scale tipping.  That was one of the early use cases for virtual currency.  For example, a blogger was not going to take credit card payments for page use, because it was too expensive.  But you could take a fraction of a Bitcoin as a tip or you could throw up a paywall that would charge someone a dollar to read a blog post, for example.  So if someone tips you, is that income or a gift?  There is use case stuff like this every year. So far, we haven’t had anything that we were stumped about.

HM: So as a CPA and a person with a background in taxation, I imagine this was just an incremental addition to your foundational knowledge?

Let me clarify that there’s a lot of stuff happening on the technical side – like blockchain as a concept – that isn’t relevant to what I do.  I can’t talk much about the technical stuff, but if you want to talk about how crypto fits within the existing tax framework, then that’s where I’m able to help you.  There’s not a lot going on that is so unique that no one has ever encountered it before.  And I think that’s the mistake that people make upfront: assuming that since no one has ever seen crypto before, it isn’t taxable.  In Code Section 71, the definition of gross income is pretty broad and crypto definitely fits within that.  So that’s not the right assumption.

HM: Can you elaborate a bit more about the due diligence you’ve done in this space? 

JT: Sure. I’ve spent a lot of time writing and speaking publicly about this space and researching the various issues that clients have brought to me.  I can’t point to one source, a book or mentor, largely because there is no such thing at least for accountants and attorneys in the land of crypto.  Even now, this is still a very much underserved space.  

Are you aware of other tax firms that have crypto as a specialization? 

For a long time, I was the only one serving those involved in crypto, at least that I knew about.  That is no longer true, but even a decade in, we are still very early on in the growth of this technology.  But there just isn’t a single source for this.  And even the authoritative sources that are out there do not necessarily agree on what’s happening in the crypto space.

HM:  What sort of emerging trends are you seeing in the cryptocurrency space with respect to taxation and regulation in the U.S.?  And any sense as to what’s happening worldwide?

JT:  A few things are going on. Probably the most compelling is El Salvador’s adoption of Bitcoin currency as its reserve currency alongside the US dollar.  It opens up some possibilities that weren’t there before. 

El Salvador didn’t have their own currency before. Their currency is the US dollar, which they don’t control.  That’s not uncommon for non-US countries, especially very small countries.  But it’s not like China dropped the Yuan.  However, the fact that El Salvador has done this means that existing law or accounting standards that disclaim crypto as currency because it is not supported by a sovereign country, now, no longer applies. This is because El Salvador is a sovereign country and they do use crypto as their currency. 

So, with regard to the Internal Revenue Code, there are places where, for example, crypto could be treated as a currency exchange transaction (selling and buying) whereas it couldn’t before, and under generally accepted accounting principles, which don’t yet incorporate cryptocurrency but do have some suggestions as to where we might go, crypto is generally treated as an indefinite-life intangible asset and one of the reasons is that it doesn’t meet the definition of cash because it’s not supported by a sovereign entity. Well, now it is.

I don’t think anything has fundamentally changed. But I think that that underscores how weak those frameworks were, to begin with when it relied on that specific trait of cryptocurrency (i.e., not supported by a sovereign country)

HM: What else? 

JT: Another trend that’s going on is that we just can’t shake the persistent accusation of cryptocurrency as a vehicle for illegal activity.  I’m not sure why that won’t go away.  By far, the US dollar is the currency of choice for people who are moving contraband or laundering money, and I don’t think you hear anybody calling for bands or tighter controls on the US dollar because criminals use it.

Then there’s the fact that we have more institutional interests this year than we have ever had before.  In large part that’s a symptom of what’s going on in our economy broadly, which is, we’ve been awash in cash now for 10 years between quantitative easing and government stimulus programs.  

You have companies like Apple that are sitting on tens of billions of dollars.  Cash that’s just sitting there.  One of the results of that is that people are looking for a return, in any way they can.  We saw this on a smaller scale in 2017 with the ICO movement where a lot of people were holding appreciated Ether, specifically, that they couldn’t cash out so they were looking to put it to work somehow. 

HM: Can you share more about ICO’s and their complicated nature 

JT: The ICO movement was tailor-made to meet a demand for investment opportunities for people who wanted to invest in crypto as opposed to dollars.  Now as it turns out a lot of those projects were failures and some of them were just straight frauds.  But it’s the same kind of attraction to an institutional investor. If you have $100 B that you have to deploy somewhere because it’s your job to generate a return on those monies, you’re probably going to be looking for anything you possibly can.  

Real estate is too hot.  The stock market is probably way over-valued.  It’s looking less safe to place money abroad for various reasons.  So what’s left on the table?  I think that’s why IPOs and private placements are hot and continue to be because there is so much demand for investment opportunities.

HM: What about Blockchain? 

Back in 2017, early 2018, the hotness of the day was blockchain and that seems to have gone away.  I don’t think any of the institutional players have found a major use case for blockchain. But now we have come full circle.  There is interest in the space again but for a different reason.

HM: Back to tax issues, what else do you see emerging? 

JT: One of the less compelling issues is a continued drumbeat of looking for a better tax treatment for crypto as an asset class.  A Cryptocurrency Tax Fairness Act gets reintroduced to Congress every session.  Thus far it has zero percent chance of becoming law because it would create an opportunity for crypto to never be taxable with relative ease.  Aside from my professional opinion, there is no public policy incentive to exempt an entire asset class from taxation.

HM: You have that there is also no public policy incentive to promote it as an alternative to the US dollar. Can you explain? 

JT: The fact that the government controls the supply of that commodity gives us quite a lot of leverage that we wouldn’t have if we weren’t able to monetize our debt, which we certainly are doing.  If anyone knows anything about the way the Federal Reserve system works will recognize that the Treasury issues treasuries and the Federal Reserve buys them with dollars that it prints.

HM: There are some who believe that crypto will eventually replace the prevailing banking system. Do you have an opinion on this? 

JT:  This space has a lot of ideology wrapped up in it.  On one hand, we have people that are looking to make as much money as they possibly can, and on the other hand, we have people that think this is going to replace what is commonly called the Legacy Financial System.  It’s not a Legacy system; it’s just the system of how business is done in the world. 

HM: So how do you believe all of this will eventually shake out? 

JT: I’m not in a position to predict the future, but I think it’s interesting that this segment has been steady for the last 8 years or so.  It hasn’t really taken off; nor has it really gone away.  It occupies a niche position, in the same way as precious metals do.  No one is seriously talking about using gold as currency, but it won’t go away.  People still like it as an investment.  People are still making money off of it.

Stay tuned for the continuation of this feature interview with Jason Tyra, CPA. We will cover:

Part 2: The biggest mistakes crypto users are making when it comes to reporting taxes.

Part 3: Tips on record-keeping and tracking mechanisms and software.

Part 4: Measures the IRS is using to track crypto tax evaders.

Holly Moore<br>
Holly Moore

Whether it’s writing content for the finance, tech, bioscience, and engineering industries, marketing and building businesses in the design and construction field, coaching on personal and professional development, acting for film and TV, taking care of animals at a wildlife conservation center, serving passengers in an airplane and on a private yacht, or teaching HIIT and water aerobics, Holly thrives off continuous learning, experiencing new environments and people, and connecting the dots to cultivate new insights and understanding. It’s what fuels her life and her writing.





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