Cryptocurrencies have made their way into the spotlight in the last few years, becoming increasingly popular with both individual investors and companies. But as their popularity has grown, so have the laws around them. As future accountants, it’s essential you understand cryptocurrencies to help you both stand out as a financial professional and provide the best service for your clients.
The biggest issue you need to know is that cryptocurrencies are considered property, not currency by the IRS. This comes with tax implications, which all accounting students should recognize and apply to their work. To help you get a better grasp of these implications we’ve put together 5 basic ideas about crypto all accounting students should know.
1. Cryptocurrency is not beyond government control
While cash is backed by the United States government, cryptocurrency is not. However, despite cryptocurrencies being completely digital, the government does regulate crypto transactions. Profits from selling cryptocurrency need to be reported as income to the IRS either as ordinary income or as a long-term gain or loss, depending on how long the crypto is held.
2. Capital gains or losses should be reported when selling crypto
Just like buying and selling stock, cryptocurrencies need to be valued when they’re purchased and again when they’re sold. The difference between the initial valuation at purchase and the valuation at the selling point is a capital gain or loss. Both should be reported on IRS Form 8949 along with all other capital gains and losses, with the total subsequently reported on Schedule D.
Just like other capital losses, cryptocurrency capital losses can offset capital gains, or they can offset up to $3,000 of ordinary income.
3. Crypto can be used to pay for products and services
Unlike stock, there are vendors and individuals that will take cryptocurrency as payment for goods or services. However, since cryptocurrency is not viewed as a legitimate currency, these exchanges are not treated like cash transactions. When you use cryptocurrency to purchase an item or service, its considered a sale of the crypto. This means you have to report it as a gain or loss, whether you’re buying a bagel or paying for bookkeeping services.
For example, let’s say you bought cryptocurrency a year ago for $1,000. Today, it’s valued at $100,000 which you decide to use to purchase a new car. In this case, you would report a $99,000 gain on the cryptocurrency, since it’s technically considered a sale of the crypto, and needs to be reported to the IRS (and subsequently taxed).
4. There are different rates depending on how long crypto is held
Like all property subject to capital gains, the rate at which the gain is taxed is dependent on how long the cryptocurrency was held. Crypto held less than a year is subject to generally higher ordinary income rates, while crypto held longer than a year is subject to the generally lower long-term capital gains rates. If accounting students go into tax professions, or work with clients on any level, they’ll need to know the distinction between short-term and long-term rates to maximize value for their clients.
5. Always keep track of cryptocurrency transactions
Accounting students are entering the profession at a time of growth and change in the area of cryptocurrency, and the one idea they should always push is for those holding cryptocurrencies to keep accurate and detailed records of any transactions. While cryptocurrency is a relatively new entrant to the market, the IRS has already developed laws and regulations surrounding it and will enforce those laws with both individuals and corporations. The best action accountants can take is to help clients navigate the area of crypto by keeping accurate records to report to the IRS.
While cryptocurrencies are relatively new entrants to the market, it’s imperative accountants know how to work with them to maximize the benefit for their clients while also abiding by tax regulations. By recognizing our 5 basic ideas listed above, accounting students will be prepared to work with clients owning and trading cryptocurrencies, which will help them stand out in the world of financial professionals.
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Megan Bierwirth graduated from the University of Kentucky in 2013 with a bachelor’s degree in accounting and passed the CPA exam within six months of graduation. She worked in both public accounting and industry while becoming a CPA and now runs a virtual bookkeeping company focused on preventive, integrative and complementary medicine professionals.