IRS

The Pope and US regulators warn about AI risks: Law Decoded

The head of the Catholic Church warned humanity of AI’s potential dangers and explained what needs to be done to control it.

Nowadays, everyone has an opinion on artificial intelligence (AI) and its potential risks. Even Pope Francis — the head of the Catholic Church — warned humanity of AI’s potential dangers and explained what needs to be done to control it. The Pope wants to see an international treaty to regulate AI to ensure it is developed and used ethically. Otherwise, he says, we risk falling into the spiral of a “technological dictatorship.” The threat of AI arises when developers have a “desire for profit or thirst for power” that dominates the wish to exist freely and peacefully, he added.

The same feeling was expressed by the Financial Stability Oversight Council (FSOC), which is comprised of top financial regulators and chaired by United States Treasury Secretary Janet Yellen. In its annual report, the organization emphasized that AI carries specific risks, such as cybersecurity and model risks. It suggested that companies and regulators enhance their knowledge and capabilities to monitor AI innovation and usage and identify emerging risks. According to the report, specific AI tools are highly technical and complex, posing challenges for institutions to explain or monitor them effectively. The report warns that companies and regulators may overlook biased or inaccurate results without a comprehensive understanding.

Even judges in the United Kingdom are ruminating on the risks of using AI in their work. Four senior judges in the U.K. have issued judicial guidance for AI, which deals with AI’s “responsible use” in courts and tribunals. The guidance points out potentially useful instances of AI usage, primarily in administrative aspects such as summarizing texts, writing presentations and composing emails. However, most of the guidance cautions judges to avoid consuming false information produced through AI searches and summaries and to be vigilant about anything false being produced by AI in their name. Particularly not recommended is the use of AI for legal research and analysis.

IRS lists 4 crypto crimes among its top cases in 2023

The cases included investigations into the Silk Road marketplace, OneCoin, Oyster Protocol founder “Bruno Block,” and a money laundering scheme using Bitcoin kiosks.

The criminal investigation unit of the United States Internal Revenue Service (IRS) has listed four crypto-related cases among the top ten of its “most prominent and high-profile investigations” in 2023.

In a Dec. 11 notice, the IRS unit said there were four significant cases in 2023 involving the seizure of cryptocurrency, fraudulent practices, money laundering and other schemes. Coming in at its third most high-profile investigation in the past year was OneCoin co-founder Karl Sebastian Greenwood, who was sentenced to 20 years in prison in September for his role in marketing and selling a fraudulent crypto asset.

Other cases included Ian Freeman, a New Hampshire resident sentenced to 8 years in prison for operating a money laundering scheme using Bitcoin (BTC) kiosks and failing to pay taxes from 2016 to 2019. The government body was also behind an investigation of Oyster Protocol founder Amir Elmaani, also known as “Bruno Block,” for tax evasion related to minting and selling Pearl tokens.

IRS team reports rise in crypto tax investigations

According to the fiscal year 2023 report, the IRS unit investigated failures to disclose crypto holdings and report on capital gains for transactions.

The Criminal Investigation (CI) Unit of the United Internal Revenue Service (IRS) reported an increase in the number of investigations around digital asset reporting.

In its annual report released on Dec. 4, the IRS investigative arm said it had initiated more than 2,676 cases in which it had identified more than $37 billion related to tax and financial crimes in the 2023 fiscal year.

“These investigations consist of unreported income resulting from failure to report capital gains from the sale of cryptocurrency, income earned from mining cryptocurrency, or income received in the form of cryptocurrency, such as wages, rental income, and gambling winnings,” said the Criminal Investigation Unit.

Our FY23 Annual Report highlights more than 2,600 investigations, $37.1 billion identified from tax and financial crimes. #IRSC #ByTheNumbers #WhatWeDoCounts
https://t.co/B1hZw8ClXm pic.twitter.com/EZWQKNB2uu

— IRS Criminal Investigation (@IRS_CI) December 4, 2023

Starting in 2019, the IRS began requiring U.S. In the report, CI chief Jim Lee said that “most people using cryptocurrency do so for legitimate purposes,” but digital assets pose a risk for financing terrorism, ransomware attacks, and other illicit activities.

Since it began increasing efforts to investigate crimes involving cryptocurrency in 2015, the IRS has seized more than $10 billion in digital assets.

Magazine: Best and worst countries for crypto taxes — plus crypto tax tips

New tax rules could mean a US exodus for crypto companies

A change to R&D tax rules means that a tech company could lose more than $1 million — but still be on the hook for hundreds of thousands in taxes.

All eyes are on the implosion of crypto banking and bank runs. Unfortunately, there is another poison that will destroy the tech industry — and it’s already eating at the core of newly successful startups. That poison is a change to research and development (R&D) credit rules under section 174. The change passed as part of the 2017 Tax Cuts and Jobs Act but was deferred until 2023 — triggering massive tax bills for already cashflow-strapped companies.

The new R&D law has overly broad language that states “any and all” software development must be amortized over five years if the development took place in the United States, or over 15 years if the work was done overseas. The change doesn’t sound so bad on its surface; some argue it might even create more tech jobs in the U.S.

But that isn’t how it will play out. Many countries have better R&D credits than the U.S. Much of U.S. software development will shift to countries such as the United Kingdom, where the rules are simpler and more lucrative. For tax-smart companies, U.S. entities will just be for marketing and sales.

Imagine a company that lost over a million dollars but owes over $300,000 in taxes! How is this possible? This hypothetical company has roughly $2.5 million in income and, in 2022, spent $1.5 million building its software and $1 million in other costs, meaning it had a negative cashflow totaling $1 million dollars. However, because the $1.5 million of development was done by a team in India, it will only see $50,000 from the software development side, leaving a $1,050,000 deduction to offset the $2.5 million of income this year — meaning it owes tax on $1,450,000 in net income, or a bankrupting $304,500 in tax!

*Cryptocurrency tax rates in select countries as of 2023*

Proponents of this tax say companies will still receive all the benefits of the deduction — just over many years. Put one of these proponents in front of a company that lost a million on operations but owes $300,000 in taxes and see if they say the same thing. Cashflow is king for finding startup success, and these types of R&D costs have been deducted nearly as long as the United States has had an income tax because of how vitally important innovation is to fueling national growth. With the current climate of high-interest rates and increased regulation, this law change will kill the most creative development in the U.S. on future-thinking technologies, such as AI and blockchain.

Some of the Big Tech layoffs taking place may be a result of this rule change. No surprise: It makes more sense to restructure so that subsidiaries outside the U.S. do R&D. For blockchain, crypto, and nonfungible token (NFT) companies that already have to deal with all the Securities and Exchange Commission scrutiny, it just seems a no-brainer to distance from the U.S. now.

There are so many complications and unanswered questions of how to apply this law that it’s head-spinning. For example, if you use a computer, server, miner, etc., for your R&D that you are depreciating, that portion of depreciation you would be able to take in 2022 must be added to the capitalization bucket to amortize out. This means if you were using this utility in the U.S. and expected to have $50,000 in depreciation come through from that equipment to deduct this year, you would only see $5,000 of that actually affect the bottom line. This really negates the purpose of special depreciation rules that encourage companies to spend on equipment, but then doesn’t actually let them see the deduction.

Another big risk with this law is if you raise money and develop with a big loss and no current income. Initially, this wouldn’t hurt you — but if your company fails, you are in for a world of pain, because the cancellation of debt income from a SAFE note that was not repaid can trigger taxes if there are no net operating loss carryovers to fully offset. And there is no way, currently, to accelerate the R&D amortization; even if a project is abandoned or a company shuts down, the expenditure cannot be taken immediately. That means equity investors may not get back funds they should receive. Instead, the money in the treasury will go to paying taxes for a failed company while founders who received salaries may even be on the hook for the tax liability or repaying investors.

Everyone in government and the tax industry knew these laws were a mess, and they were set to be repealed by a bipartisan supported bill in Congress on Jan. 3. But the effort failed because Democrats wanted to increase the Child Tax Credit — at the last minute — after everything had been agreed, and Republicans wouldn’t go along with it.

Now, it seems we are stuck with this crazy innovation-killing tax law. A repeal proposal has been reintroduced but hasn’t gained much traction. Especially in light of the current fundraising challenges for blockchain companies caused by increased interest rates, the crypto winter, and the Silicon Valley Bank failure, we may see a massive and unnecessary die-off of tech companies, unless some major action is taken by Congress quickly.

Crystal Stranger is a federally-licensed tax EA and the chief operating officer at GBS Tax. She worked previously as a software developer in San Francisco.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Biden’s policy on crypto taxation undermines his environmental goals

We don’t tax houses while they’re under construction, and we shouldn’t impose taxes on cryptocurrency while it’s staked.

Gains accrued by staking cryptocurrency should not be treated as a taxable event. It only makes sense to tax such gains upon their conversion to legal tender currency. To do otherwise undermines a marquee environmental policy from the administration of United States President Joe Biden.

The Internal Revenue Service appears strongly inclined to treat staking gains as immediate income. The penalties for getting sideways with the IRS can be draconian. And taxing, or threatening to tax, staking gains is bad policy — and, ahem, bad politics.

There are many excellent reasons not to treat staking gains in and of themselves as taxable events. The best reason is to put the IRS back in line with White House environmental policy to fight climate change.

If the IRS won’t administratively comply with the Biden administration’s clearly stated marquee policy, it’s time for Congress to clarify the law and prohibit the taxing of unrealized gains.

Deferring gains until sale merely defers receipt of taxes by the Treasury. It doesn’t cost the government even one thin satoshi. So, what’s going on?

Crypto is legitimately subject to taxes in many ways. You’ll pay taxes when you sell your crypto, or even exchange it for other forms of crypto. (Elsewhere, we have called upon Congress to enact a deferral for crypto-to-crypto exchanges, a subject beyond the scope of this article.)

Taxing staking gains is antithetical to a clearly expressed marquee White House policy. It’s also antithetical to generally accepted notions of good tax policy.

Uncle Sam does not tax Jasper Johns while turning a blank canvas into a multimillion-dollar artwork. He is not taxed when he consigns it to a gallery for sale at a posted price. He gets taxed when he is given the million-dollar check for his latest masterpiece.

This obviously makes sense. Uncle Sam won’t take a piece of a painting (or even a fractional interest therein) in payment of taxes. How would an artist be expected to pay the tax on a work-in-progress or a work merely listed for sale? Taxing artworks during their creation would be ridiculous!

Uncle Sam does not tax a building contractor while building a home, nor even when he turns it over to a realtor for sale. The IRS collects taxes upon sale.

This obviously makes sense. One can only guess at an asset’s value until it’s sold, and even then, one doesn’t have the cash to pay the taxes until sale proceeds are received. Moreover, the IRS doesn’t “do windows” — or take lumber or any other in-kind payment of taxes. Taxing housing under construction would be preposterous!

Taxing staking gains while they are in process is nonsensical and inconsistent with the treatment of other created assets. The IRS has staked out a real Alice in Wonderland policy on this one. And taxing such gains does Americans, and America, real damage, driving wealth creation and good jobs offshore (against stated presidential policy)!

Yet perhaps the most compelling reason for the IRS to stop taxing staking gains — and, if it does not, for Congress promptly to fix this — is that President Biden has made reducing CO2 emissions a signature administration priority.

The IRS taxing staking gains upon occurrence (rather than upon sale or exchange of those gains) badly undermines two of the administration’s top priorities: onshoring good jobs and fighting climate change. Bureaucracy trumps democracy? Shameful!

Support from Democrats on the Hill for their party’s leader for forbidding taxing staking gains may be assumed. And there are certainly enough sophisticated Republican Congresspersons to pass a law forbidding the taxing of staking gains.

So, what (no pun intended) is at stake? Proof-of-work crypto uses vastly more energy, generating vastly more emissions than proof-of-stake. Per the White House’s Office of Science and Technology fact sheet dated Sept. 8, 2022:

“From 2018 to 2022, annualized electricity usage from global crypto-assets grew rapidly, with estimates of electricity usage doubling to quadrupling. […] Switching to alternative crypto-asset technologies such as Proof of Stake could dramatically reduce overall power usage to less than 1% of today’s levels.”

Taxing those gains before they are realized will also cripple the movement to proof-of-stake.

To summarize, there are intractable practical problems in taxing an asset at its creation. People can only guess the value of an asset until sold. The IRS doesn’t accept payment in kind (were that even possible, as frequently it’s not).

Many taxpayers don’t have the actual cash to pay their taxes until realizing the proceeds of sale. It is cruel and counterproductive to turn honorable citizens into tax cheats and criminals via bad regulation. It will drive crypto, and the attendant jobs and wealth creation, out of the United States. And deferring taxation until sale postpones but does not cost the government any tax revenue.

Most of all, the treatment of staking gains as a taxable event undermines the Biden administration’s stated top priority of onshoring jobs and reducing CO2 emissions.

Stop treating staking gains as a taxable event! If Biden and the IRS turn a deaf ear, Congress should take up the issue.

Todd White is the founder of the American Blockchain PAC. Ralph Benko is senior counselor to the group.

Ted Cruz and Ron DeSantis take on the ‘digital dollar’: Law Decoded, March 20–27

Two lawmakers in one week weighed in against the possibility of a United States central bank digital currency.

Two lawmakers in one week weighed in against the possibility of a United States central bank digital currency (CBDC). Florida Governor Ron DeSantis — expected by many to throw his hat into the ring for the 2024 U.S. presidential race — has called for a ban on a digital dollar in the state. DeSantis spoke out against the Federal Reserve issuing and controlling a CBDC, claiming the initiative would grant “more power” to the government.

Texas Senator Ted Cruz went even further, introducing a bill to block the Fed from launching a “direct-to-consumer” central bank digital currency. Cruz stated it’s “more important than ever” to ensure U.S. policy on digital currencies protects “financial privacy, maintains the dollar’s dominance and cultivates innovation.” The anti-CBDC bill is a second attempt by Senators Cruz, Braun and Grassley, who introduced a similar bill on March 30, 2022, to prohibit the Fed from issuing a CBDC directly to individuals.

Representative Tom Emmer introduced another anti-CBDC bill in February. The bill could prohibit the Fed from issuing a digital dollar directly to anyone, bar the central bank from implementing monetary policy based on a CBDC, and require transparency for projects related to a digital dollar. It’s also presented as an apparent effort to protect Americans’ right to financial privacy.

G7 to collaborate on tighter crypto regulation

The next G7 meeting in May might bring a push from seven of the world’s advanced economies for stricter regulations on cryptocurrencies globally. Together, leaders from Japan, the United States, the United Kingdom, Canada, France, Germany and the European Union will outline a cooperative strategy to increase crypto transparency and enhance consumer protections, as well as address potential risks to the global financial system, officials told journalists.

Recommendations on the regulation, supervision and oversight of global stablecoins, crypto assets activities and markets are scheduled to be delivered by July and September 2023. It is unclear, however, what the overall tone of the recommendations will be.

IRS calls for public feedback on taxing NFTs

The U.S. Internal Revenue Service (IRS) said it plans to release guidance on having nonfungible tokens (NFTs) treated as collectibles under the U.S. tax code. According to the government body, collectibles under U.S. tax law “do not have as advantageous capital-gains tax treatment as other capital assets,” seemingly referring to how crypto assets are currently taxed in the country. Under the U.S. tax code, selling collectibles such as coins or artwork is subject to a maximum capital gains tax rate of 28%. The proposed IRS guidance could apply the same standard to an NFT certifying ownership of a coin, piece of art or similar collectible.

Texas lawmaker introduces resolution to protect Bitcoin miners

Cody Harris, a member of the Texas House of Representatives, has introduced a resolution to have the legislature say the “Bitcoin economy is welcome” in the state. Harris encourages Texas lawmakers to “express support for protecting individuals who code or develop on the Bitcoin network,” as well as miners and Bitcoiners operating in the Lone Star State. House Concurrent Resolution 89, if adopted, would largely not apply to Texas’ laws and regulations but instead express a certain sentiment among lawmakers.

IRS calls for public feedback on taxing NFTs as collectibles

Those wishing to offer feedback to the IRS on having NFTs treated as collectibles, such as coins or works of art, have until June 19 to submit comments.

The United States Internal Revenue Service said it plans to release guidance on having nonfungible tokens, or NFTs, treated as collectibles under the U.S. tax code.

In a March 21 notice, the IRS called for feedback from the U.S. public on how NFTs could be taxed as collectibles. According to the government body, collectibles under U.S. tax law “do not have as advantageous capital-gains tax treatment as other capital assets,” seemingly referring to how crypto assets are currently taxed in the country.

“Until additional guidance is issued, the IRS intends to determine when an NFT is treated as a collectible by using a ‘look-through analysis,’” said the notice. “Under the look-through analysis, an NFT is treated as a collectible if the NFT’s associated right or asset falls under the definition of collectible in the tax code.”

Under the U.S. tax code, selling collectibles such as coins or artwork is subject to a maximum capital gains tax rate of 28%. The proposed IRS guidance could apply the same standard to an NFT certifying ownership of a coin, piece of art or similar collectible.

The IRS called for comments to be submitted by June 19, so U.S. taxpayers needing to file their 2022 returns before the April 18 deadline likely won’t be affected. Forms require anyone receiving, earning, transferring or selling crypto to check a box in the affirmative to correctly report their taxes and, depending on the filer’s status, report transactions as capital gains or income.

If you owe taxes, it's important to file your #IRS tax return by the due date and pay as much as you can. Late-filing penalties are calculated based on the amount owed for each month a tax return is late. See https://t.co/tZ7Ni3lhn3 pic.twitter.com/FEnYtsBDiT

— IRSnews (@IRSnews) March 21, 2023

In October, the IRS introduced a draft bill proposing NFTs and cryptocurrencies be reported in a broad “Digital Assets” section for tax purposes. Generally, if a U.S. taxpayer hodls all digital assets for an entire year or transfers them between wallets they control, those holdings do not need to be reported.

Bitcoin-friendly Cash App integrates TaxBit amid tax-filing season

Bitcoin evangelist Jack Dorsey’s Cash App is making it easier for BTC holders to calculate their taxes with the TaxBit integration.

Mobile payments processor Cash App has integrated crypto tax and accounting software TaxBit into its services, giving Bitcoin (BTC) holders a more streamlined approach to reporting their taxes.

As of Feb. 28, Cash App users can now keep track of their Bitcoin transactions for tax reporting purposes using TaxBit, both companies announced. TaxBit’s chief operating officer Lindsey Argalas said her company’s platform simplifies tax reporting “for everyone who has integrated digital assets into their portfolio.”

Cash App launched its Bitcoin trading services in 2018 and rolled out BTC deposits the following year. The company claims to have over 10 million Bitcoin users. Cash App’s parent company, Block Inc., has generated billions of dollars in Bitcoin revenue over the years. According to United States Securities and Exchange filings, Block Inc. generated $1.96 billion in Bitcoin revenue during the fourth quarter of 2021.

TaxBit launched TaxBit Network in 2022 to provide crypto traders free tax forms. The industry consortium launched with over a dozen U.S.-based companies, including PayPal, Coinbase, Binance.US, Paxos and Gemini.

Three things are certain in life: Death, taxes, and Bitcoin’s scarcity! pic.twitter.com/Y3WZwIUpGV

— Cointelegraph (@Cointelegraph) January 9, 2022

Washington’s Internal Revenue Service, or IRS, set Jan. 23 as the start of the 2022 tax filing season. Most taxpayers have until April 18 to file and pay taxes owed. In January, the IRS reminded taxpayers of their crypto income reporting obligations — this includes capital gains from trading, mining and staking activities.

ConsenSys releases statement of support for continuation of the Jarrett tax case

The court dismissed the Jarretts’ case over the taxation of staking rewards after the IRS issued the refund the couple sought; not good enough, they said.

ConsenSys issued a statement Feb. 7 in support of the appeal of the Jarrett v. United States case concerning the taxation of staking rewards. The case originated in a dispute over a refund of about $4,000 that Joshua and Jessica Jarrett claimed on Tezos (XTZ) tokens they validated in 2019.

The Jarretts claimed their staking rewards should be treated as property and taxable only on upon their sale. After the U.S. Internal Revenue Service (IRS) ignored their refund claim, the Jarretts filed suit.

They issued the refund in 2022, but the Jarretts refused it, preferring to pursue their legal case. “I need a better answer,” Joshua Jarrett said at the time.

Their suit was subsequently dismissed, however, after a Tennessee district court ruled in October that the payment of the refund rendered the case moot. Now the Jarretts are appealing that decision.

ConsenSys senior counsel and director of global regulatory matters Bill Hughes said in a statement:

“We support Josh and Jessica Jarrett’s appeal because we believe that US taxpayers, who run many of the validators on Ethereum, deserve fair treatment under the tax code. […] We are glad that the Jarretts will not allow the IRS to dodge this issue by asking an appeals court to reinstate their case.”

The ConsenSys statement went on to note that the Ethereum Shanghai update scheduled for March will allow validators to withdraw 16 million staked Ether (ETH), making the tax treatment of staked crypto a timely issue. The private blockchain reiterated its position on taxation in the statement:

“Similar to a farmer who grows crops, staking rewards are created by the protocol to incentivize participating in providing security for the protocol. Created property is not taxed until sale.”

The Proof of Stake Alliance has also been a strong supporter of the Jarretts. That organization released a statement after the October court decision, saying, “The IRS offered Josh a tax refund for 2019, and while this obviously suggests the IRS agrees with Josh, the IRS refused to confirm this or to assure Josh of the same tax treatment going forward.”

️Proof of Builders️

Our CEO, @ethereumJoseph joined @adambn on stage @BuildingBlock_s to share his story about how he founded @ConsenSys and how instrumental it was in shaping the @ethereum ecosystem.⚡ #ETHTLV #BuildingBlocks pic.twitter.com/6enq6Mbm24

— ConsenSys (@ConsenSys) February 7, 2023

What crypto hodlers should keep in mind as tax season approaches

Filing crypto taxes can be complex, especially for those exploring the decentralized finance world. Here’s what to keep in mind.

Filing taxes for cryptocurrency can be a confusing and daunting task for many individuals. The United States Internal Revenue Service (IRS) treats cryptocurrency as property subject to capital gains taxes. Knowing this appears to make filing crypto taxes simple, but crypto’s unique nature means there are many unanswered questions.

Accurately reporting gains and losses can be a nightmare. While everyone concerned about tax season knows that keeping accurate records of every crypto transaction is a must, there are other things to keep in mind.

There is a difference between short-term and long-term capital gains taxes, with tax rates varying depending on multiple factors. These capital gains tax rates are available online and are beyond the scope of this article, which will focus on avoiding potential issues with the IRS while filing taxes on crypto.

How to report crypto taxes

Filing cryptocurrency taxes isn’t a choice; it’s an obligation that every individual and business has. Those who keep track of their transactions — including the prices of the cryptocurrencies they transact — will have an easier time reporting their activities.

Even those who haven’t received any tax documents associated with their cryptocurrency movements may have taxable events to report. Speaking to Cointelegraph, Lawrence Zlatkin, vice president of tax at Nasdaq-listed cryptocurrency exchange Coinbase, said:

“Crypto assets are treated as property for U.S. tax purposes, and taxpayers should report gains and losses when there is a sale, exchange, or change in ownership (other than a gift). Merely HODLing or transfers of crypto between a taxpayer’s wallets are not taxable events.”

Zlatkin added that more advanced trading “where there is a change in economic ownership, literally or substantively, may be taxable,” even if the taxpayer doesn’t receive an IRS Form 1099, which refers to miscellaneous income.

Meanwhile, Danny Talwar, head of tax at crypto tax calculator Koinly, told Cointelegraph that investors can report cryptocurrency gains and losses through Form 8949 and Scheduled D of Form 1040.

*IRS building in Washington D.C. Source: Joshua Doubek*

Talwar said that investors with cryptocurrency losses after last year’s bear market might be able to save on current or future tax bills through tax loss harvesting.

Tax loss harvesting refers to the timely selling of securities at a loss in a bid to offset the amount of capital gains tax that would be payable on the sale of other assets at a profit. The strategy is used to offset short-term and long-term capital gains. Coinbase’s Zlatkin addressed this strategy, saying, “losses from sales or exchanges of crypto may result in capital losses which can be used to offset capital gains and, in limited circumstances for individuals, some ordinary income.”

Zlatkin added that losses “may not have been sufficiently crystallized from pending and unresolved bankruptcy or fraud,” adding:

“Taxpayers should be careful in how they treat losses and also consider the possibility of theft or fraud losses when the facts support these claims.”

He said that crypto investors should consult their tax advisers regarding any available tax breaks or deductions. Investors should also be aware of losses from “wash sales,” which Zlatkin described as “sales of crypto at a loss followed soon thereafter by the repurchase of the same type of crypto.”

Speaking to Cointelegraph, David Kemmerer from cryptocurrency tax software company CoinLedger, said that losses realized in 2022 can be an “opportunity” to reduce a tax bill, with capital losses offsetting capital gains and up to $3,000 of income per year.

David Kemmerer added that it’s “important to remember that exchange and blockchain gas fees come with tax benefits,” as fees “directly related to acquiring cryptocurrency can be added to the cost basis for the asset.”

He added that fees related to disposing of a cryptocurrency could be subtracted from the proceeds to help reduce capital gains taxes.

While the IRS has somewhat clear guidance on taxes owed from buying and selling cryptocurrency, tax forms for those involved in the sector can get more complex if they delve deep into, for example, the world of decentralized finance (DeFi).

Tax complexities with DeFi, staking and forks

Using DeFi can be complex, with some strategies involving multiple protocols to maximize yield. Between cryptocurrency-backed loans, transactions involving liquidity provider tokens and airdrops, it’s easy to lose track.

According to Coinbase’s Zlatkin, “most forms” of cryptocurrency rewards or yield are subject to U.S. tax when received.

He said that current U.S. laws on staking income are “undeveloped,” with the IRS treating staking rewards as “giving rise to taxable income when an individual taxpayer receives staking rewards over which the taxpayer has ‘dominion and control,’ or basically when the asset can be monetized.”

When it comes to airdrops and forks, CoinLedger’s Kemmerer noted that income from cryptocurrency forks and airdrops is subject to income tax, just like income from any other job. He said that when a fork or an airdrop lead to new cryptocurrency being earned, investors “recognize ordinary income based on the fair market value” of that crypto at the time of receipt.

Cryptocurrencies, nevertheless, go beyond these use cases. Many use crypto debit cards in their day-to-day lives, which means that in the eyes of the U.S. government, they’re paying for goods and services using property. What happens when it’s time to tell the IRS?

Tax implications of using crypto for payments

While defining cryptocurrency payments as property transactions sounds like a complex ordeal, according to Kemmerer, using crypto as a payment method is “considered a taxable disposal, just like selling your crypto or trading your crypto for another cryptocurrency.” He added:

“If you use your cryptocurrency to make a purchase, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it. “

Coinbase’s Zlatkin said this is true “even if the transaction is small, like buying a cup of coffee or a pizza.” If a payment is taxable when made with cash, it remains taxable with crypto, he added, stating:

“Furthermore, the recipient is generally treated as if they received money in the transaction and subsequently purchased the cryptocurrency with that money, and they are taxed accordingly.”

At this point, it’s clear that filing taxes related to cryptocurrency transactions is a complex process that needs to be well thought out. Cryptocurrency users need to consider all of this and avoid common pitfalls.

Keeping records is vital

Tax experts have repeatedly stressed that keeping records of every cryptocurrency transaction is key to avoiding incidents with the IRS. CoinLedger’s Kemmerer noted that without accurate records, “it can be difficult to calculate capital gains and losses.”

He added that records should include the date that users originally received their cryptocurrency and the date they disposed of it. This should be accompanied by the cryptocurrency’s price at the time of receipt and disposal.

*The newly-added crypto question on United States tax form 1040. Source: CNBC*

Koinly’s Talwar told Cointelegraph that it’s “often easy to miss the number of taxable events which may occur during the year” because acquiring and spending cryptocurrency is “becoming more accessible than ever, with exchanges and products providing seamless user interfaces.” Talwar added:

“It is easy to misunderstand when a taxing point arises for crypto. Many people don’t realize that their staking rewards are taxed as income when received, even if they haven’t sold the underlying staked asset.”

Talwar advised those heavily involved in cryptocurrency to consult a tax professional during tax season to help them figure everything out.

Filing crypto taxes can be daunting for many, adding a new layer of complexity to an already hard-to-grasp sector that’s constantly evolving. Offsetting tax bills with potential losses can incentivize sophisticated investors to take risks in the space, as even their losses can help reduce their tax burden.

As the law is still unclear regarding some of the cryptocurrency sector’s more complex operations, those who prefer to avoid risks and stay on regulators’ good side should consider avoiding DeFi. Either way, consulting with a professional is less expensive and less stressful than dealing with fines and enforcement actions from tax authorities.

This article does not contain tax reporting advice or recommendations. Readers should conduct their own research and consult a professional when filing taxes on their investments and holdings.