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When it comes to “cryptoassets,” or cryptocurrencies, you are probably familiar with the most popular ones out there, such as Bitcoin, Ripple, Litecoin and Ethereum. These are essentially a kind of electronic cash, exemplifying the secure technology that not only records who owns what but also makes the payments being passed between users. Unlike physical cash you can carry in your pocket, cryptocurrencies exist electronically, operating under a peer-to-peer system. What this means is that there is no central bank or government managing them that can step in if something goes wrong, making them vulnerable to risk if something goes awry.
AICPA Letter
Recently, the AICPA sent a letter of comments and recommendations to the IRS about further guidance on how cryptoassets are treated tax-wise. The letter offers recommendations for the question about filers dealings in “virtual currency” asked in Form 1040, the U.S. Individual Income Tax Return and other forms listed in the 1040 series since the tax year 2019.
While the question originally showed up on Schedule 1 of the form in 2019, it has since been on the front page of Form 1040. The AICPA’s letter of comments and suggestions seeks to establish the question with uniform, clear and authoritative meanings. _See Full Article:
https://www.thetaxadviser.com/news/2022/aug/aicpa-recommends-changing-cryptoasset-question.html_
Defining ‘Virtual Currency’: The initial recommendation suggests making “virtual currency” (as defined in the instructions on Form 1040) consistent with the official IRS guidance (Rev. Rul. 2019-24 and Notice 2014-21.) As they are right now, these definitions are significantly dissimilar. Instructions on the form list three ways virtual currency functions: “as a unit of account, a store of value, or a medium of exchange.”
This formatting indicates that if even one of these is applicable, the transaction was completed with virtual currency. Rev. Rul. 2019-24, however, lists these functions identically in varying order, where the list is joined by “and,” insinuating that all three functions have to be there to be considered virtual currency. Right now, none of those three phrases is defined, whether on the form instructions, in the frequently asked questions area or in the IRS official guidance, leading to confusion.
1-Digital Assets: This term in the 2022 draft Form 1040 is new, with the requirement that brokers of digital assets file a yearly information return detailing customers’ specified transactions. This is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” The AICPA letter recommends that until final regulations are made, Form 1040 should continue to use the term “virtual currency” instead of “digital asset.”
2-Terminology Simplification: The AICPA letter notes that the question has evolved so that it is now complex and potentially confusing for taxpayers trying to fill out their forms. For example, the draft 2022 question asks: “At any time during 2022, did you: (a) receive (as a reward, award, or compensation) (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” The AICPA recommends changing this to: “At any time during 2022, did you have a taxable event involving virtual currency?”
3-Transactions by Nonfilers and Dependents: Currently, the instructions don’t say whether a person who otherwise does not have a filing obligation (if their income is under the filing threshold) must file a return to answer the question. The instructions should be clear, affirming that no return is required just to answer the virtual currency question. Not to mention that some taxpayers’ dependents might have a virtual currency transaction but are not required to file a return because their income is still under the filing threshold. The instructions should be clarified about whether the filer must answer the question “yes” even though they are not the direct owner of the virtual currency, says the AICPA letter.
Corporate Capital
We hope this information has been helpful in some way. Corporate Capital, Inc. located in Las Vegas, Nevada, is proud to be a one-stop shop for all the services a business needs, from setting up corporations and LLCs and building business credit, to estate planning. When it comes to finding a good CPA or accountant, we’ve got you covered there too! We understand that our clients have several options when it comes to tax planning and preparation but are your accountants or CPAs putting thousands of dollars back into your pocket each year?! Please contact us today or give us a call at 855-371-0070 and allow us to look at your 2022 numbers to see if proper tax planning makes sense for you and your businesses.