1040 US tax form with bitcoin and US coin.

Tax implications emerge as crypto growth soars

As a specialist in tax issues surrounding cryptocurrencies, Ryan Losi has become increasingly busy over the past few years.

Losi is the executive vice president of the CPA firm PIASCIK. He specializes in strategies and approaches to minimize taxes on cryptocurrencies, tax compliance, and knowledge of the penalties for crypto holders who fail to disclose these assets on their tax returns. 

Ryan Losi.

One of Losi’s key responsibilities is crafting tax positions when the authorities give unclear guidance or could be suspect in logic.

He’s been watching the space for close to a decade and is well-versed in contrarian schools of thought regarding crypto’s origins.

Toward the middle part of the 2010s, Losi began hearing from clients, many ex-pats who were becoming involved with alternative investments. He needed to understand what type of asset it was considered and how it should be taxed.

That was hard in the early years, considering the IRS did not guide 2014, Losi said. When the dollar amount was smaller, it differed, but when the assets began growing dramatically, one could not sign a return in good faith without addressing their impact.

Crypto explosion

The business began to pick up in 2016 and 2017 when a market with a few cryptocurrencies exploded to more than 1,000.

That raised a problem because how did one properly declare it? Back then, you could argue deferring gains via Section 1031 Exchange because that section of the Code applied to both real and personal property held for investment until the TCJA limited it to real property only, Losi explained.

“It kind of acts like a security and looks like a security, so do you treat it like one or not?” Losi asked. “The IRS was silent for so long it puts taxpayers in an area of uncertainty.”

As the growing value of cryptocurrencies generated increased media attention, the IRS began watching the space more closely.

Congress has also acted, and beginning Jan. 1, 2023, cryptocurrency exchanges must report cryptocurrency transactions on Form 1099 for transactions over $10,000. This action was included in the Infrastructure Investment and Jobs Act of 2021.

On occasion, a tax specialist may disagree with the guidance provided by the IRS and make a decision while preparing their taxes that at first glance goes against aspects of IRS guidance, Losi said.

The tax professional prepares reasonable cause for every position in such a situation. It protects the client if the position either fails or gets challenged.

The transaction is disclosed on the return, which tells the IRS you know this affects your tax, and this is how you have chosen to treat it.

“As long as there is a reasonable basis for the position, even though we may not prevail and owe tax, they won’t get hit with preparer penalties, accuracy-related and/or substantial underpayment penalties,” Losi said.

Proof of stake ESG friendly

Green cryptocurrency mining and ESG principles are two hot topics for tax professionals working in crypto, Losi said.

They are encouraging the migration away from proof of work strategies due to the amount of energy the process takes. Proof of stake is more ESG friendly.

There is also the issue with staking taxable rewards though many practitioners believe they may not be taxable on issuance.

The holder is receiving interest in exchange for lending their funds, so who is to say they are not receiving a right of some type? How is it different from a stock distribution that is not a taxable event until someone sells?

If it’s a nominal sum, perhaps pay the tax, Losi suggested. But if it’s a significant amount (for some, it’s millions at stake) and you’re receiving eight or 12%, you do not likely want to pay that tax today.

A Tennessee couple sued the IRS last year and were granted a refund under similar circumstances.

Cryptocurrencies could have roles on the global stage, Losi suggested. How many Ukrainians are holding them right now? How much does Putin have?

He said good luck getting ahold of those funds while adding he would not be surprised if Russia has been growing a crypto war chest in preparation for the invasion. Russia and China would love to displace the dollar as the global reserve currency.

Does crypto influence their strategy?

Wash rule

There’s a nice little benefit for crypto holders under the current rules, Losi said.

The wash sale rule prohibits investors from deducting from securities they sell at a loss and repurchasing either the same security or a substantially similar one within 30 days before or after the sale.

Because crypto has not been classified as a security, investors can sell them on a dip and use the losses against any tax bill while being free to re-buy them shortly thereafter.

Another exciting topic is the possibilities around tokenization of assets such as real estate that previously had higher barriers to entry. Your tax responsibility in these situations depends on the rights included in the purchase, Losi said.

Can you pass them on to your heirs? Are you allowed to lease out the real estate or live in it yourself?

“Maybe it allows access to more investors, and that’s great, but it comes with obligations,” Josi said. “You have to know what you’re investing along with the rights associated with that.”

  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.