The Cryptocurrency Tax Lawyers (A Guide to Crypto Taxes)

Cryptocurrency Tax Lawyers

Cryptocurrency and Bitcoin Tax Lawyers Worldwide

The past few years have been a whirlwind for investors in cryptocurrency. While values have skyrocketed, the Internal Revenue Service and US Government in general have placed cryptocurrency at the top of the compliance enforcement list. Whether it was the introduction of the J-5 Global Initiative; issuance of Letters 6173 and 6174; the introduction of FinCEN regulations — or the passage of the infrastructure bill — cryptocurrency is at the forefront of enforcement. In fact, the Justice Department recently stated that it anticipates seizing billions in fraudulent crypto. The Tax rules for cryptocurrency are also in flux. In general, Taxpayers will pay tax on the sale or exchange of cryptocurrency such as Bitcoin and Ethereum — whereas the mere purchase of crypto and other virtual currency is not a taxable event. Our Board-Certified International Tax Law Specialist team and cryptocurrency tax lawyers have summarized the basics of cryptocurrency — although it is important to keep in mind that the rules are in flux.

What do Cryptocurrency Tax Lawyers do?

Different types of cryptocurrency tax lawyers handle different types of issues. For example, at Golding & Golding, we specialize in Voluntary Disclosure and Offshore Tax Amnesty. When it comes to Cryptocurrency, some of the key issues involve:

• • • Cryptocurrency Income Tax

    • Cryptocurrency Capital Gain Tax

    • Reporting Cryptocurrency on an FBAR

    • Disclosing Offshore Cryptocurrency on International Informational Returns

    • Cryptocurrency PFIC Reporting

An Introduction by our Cryptocurrency Tax Lawyers

The foundation for the rules and regulations involving cryptocurrency are still being laid, but the following is a summary of the basics involving how cryptocurrency should be taxed and may be recorded.

Here are some of the basics:

Do I Pay Tax When I Purchase Cryptocurrency?

No, taxes are not made at purchase. Cryptocurrency is considered property.  When a person purchases property, they do not pay tax because the purchase price of property is not a taxable event.

For example, last week you purchased a home for $300,000. You are not taxed on the purchase of the home, because it is not a taxable event.

The Purchase Date and Value of Cryptocurrency is Important

The date you purchased cryptocurrency (and fees you paid), will typically form the basis of your “property” and is a very important value. This is called your “basis.” That is because at a later date, when you sell or exchange the cryptocurrency, the basis will serve as the purchase/acquisition price — and will help determine what taxes you may owe to the IRS

What Happens When You Sell Cryptocurrency?

When you sell cryptocurrency, you have engaged in a taxable event.  At the most basic level, you purchased something previously, and now you want to sell the property – hopefully for a profit, which is considered Capital Gain (excluding inventory).

Example of a Cryptocurrency Sale and Tax

David purchased $25,000 of Bitcoin on January 1, 2024, and sold it on December 15, 2024 for $30,000 When David sold the Bitcoin for $30,000, he made $5000 — and the IRS wants to tax David on his $5,000 profit. 

Here’s how it works:

Short-Term Capital Gain

Since David purchased and sold Bitcoin in the same year, he held the cryptocurrency for less than a 12-months and it is considered a short-term capital gain. A short-term capital gain is taxed at the same tax rate as regular income.  Therefore, there is no special tax credit or treatment for short-term sales of a property (exclusions, exemptions, and limitations permitting)

Long-Term Capital Gain

Referring to the same example from above, instead of selling the Bitcoin on December 15, 2024, he sold it on February 8, 2025. This changes the nature of the cryptocurrency sale. That is because more than 12-months have passed since David purchased the Bitcoin. Therefore, David’s sale will be considered a long-term capital gain.  The reason why this is important is because long-term capital gain receives beneficial tax treatment.

Long-term capital gains have a preferred tax rate.  The tax rate for long-term capital gains is 15% unless a person falls into the top tax bracket, in which the tax rate jumps to 20%.

**Long-term capital gains rules can change, so it’s important to keep up with the rules in the year you sold it.

Short-Term vs. Long-Term Capital Gains example

Michelle and David each earn $800,000 a year and are both in the top tax bracket.  If David and Michelle each purchased cryptocurrency for $30,000 and each sold it for $100,000, here is how the different situations tax situations will play out:

David’s Short Term Gain

David would have a $70,000 dollars again that will be taxed as ordinary income tax rate, and his net effective tax rate would be somewhere between 35 to 40%. (about $25,000).

Michelle’s Long Term Gain

Michelle has a $70,000 that will be taxed at 20%.($14,000).

If Michelle was not in the top tax bracket, it would be taxed at 15% ($10,500).

Income Tax & Cryptocurrency

If a person receives cryptocurrency as a result of employment, then the cryptocurrency value is determined on the day it is received and Income taxes must be paid. In other words, if your employer paid you $400,000, but paid you in cryptocurrency instead of a check or cash, you still owe income tax that you would have otherwise had to pay if you had received the money via regular currency – and you would have to pay any potential social security tax, NIIT, etc.

The concept is that the IRS is not going to let you or your employer circumvent the tax rules to avoid paying tax, just because you received cash equivalent instead of actual cash. From a baseline perspective — you work, and as a result of your work you were paid, and now the IRS wants its cut.

Your basis in the future sale of the cryptocurrency at a future time would be $400,000.

Tax Rules for Exchanging Cryptocurrency 

Exchanges in general can be confusing when it comes to the taxation portion of the exchange, so we are going to do our best to keep it very simple, using this example:

• • Jennifer purchased Bitcoin for $10,000 and is now worth $20,000.

  • Peter purchased Litecoin for $5,000 and is now worth $17,000.

For one reason or another Jennifer wants to Exchange her bitcoin for Peters Litecoin.

Jennifer: Jennifer has a basis of $10,000. She is receiving Peter’s cryptocurrency for $17,000, which is the current market value. Jennifer has a gain of $7,000 of which she will pay tax on. In the future, when Jennifer wants to sell her cryptocurrency, her new basis would be $17,000 instead of $10,000 because she paid tax on the full value.

Peter: Peter has a basis of $5,000 in the Litecoin. He is receiving cryptocurrency worth $20,000. Therefore, Peter has a gain of $15,000, which he will also pay tax on. In the future, if he wants to sell cryptocurrency, his new basis will be $20,000. In other words, when you exchange one piece of property for another, you receive the property at the current market value.

So, if you receive a piece of property that is more valuable than the property you have, you pay capital gain tax (usually) on the gain.

You determine the tax by subtracting the cost of the purchase of the property from the market value of the property you received, to determine your gain amount – and you pay tax on the gain amount.

You Received Cryptocurrency as a Gift

This is a common issue our cryptocurrency tax lawyers see daily: If you receive cryptocurrency as a gift, the typical tax rule is that you receive the carryover basis, which will serve as the basis for your crypto currency. For example, your grandma purchased cryptocurrency a few years back for $20,000. Since your grandma spends her days researching cryptocurrency, she believes her investment is going to increase in value.

Your grandma was correct because now it’s worth $400,000.   She gives you the cryptocurrency and tells you to go enjoy yourself. You decide you want to buy a house, but they do not accept Cryptocurrency as legal tender, so you sell the crypto first.   Do you receive $400,000 tax-free, since that is the Fair Market Value on the date you received it?

No. Rather,  when you receive the gift from your grandma, you have to take it at the value she purchased it for, which is $20,000 – which also means you have a $380,000 gain on the exchange. (aka Carry-Over Basis)

You Received Cryptocurrency as an Inheritance (Step-up)

Unfortunately, your sweet grandma passed away before she had a chance to give you the gift.   But, she was smart, she had a will, and she left you her cryptocurrency in the will. Under estate tax rules, you receive the market value of the property on the date your grandma passed aka (Stepped-Up Basis). Therefore, the value of the cryptocurrency you receive is now $400,000, so when you sell the Crypto for $400,000, you do not pay any tax.

1031 and Cryptocurrency

A 1031 exchange is a way to defer tax. 

For example, you have a rental property that you purchased for $100,000 that is now worth $1,000,000. You don’t want to sell the property and pay tax, so you would rather shift the investment into a new rental property or something similar (since you are relocating) You execute a 1031 exchange (which has very specific timing rules and holding requirements) and absent any boot (usually cash or mortgage payoff in addition to the property) you receive a new property, while maintaining the same basis ($100,000) and it is not considered a sale, so that you do not have to pay Capital gains tax at the time.

Unfortunately, at this time 1031 rules do not apply to cryptocurrency for exchanges for coins in 2018 and subsequent (e.g., when filing your 2017 tax return in 2018 regarding prior exchanges, there may be room for debate, but most likely not for exchanges made in 2018 going forward)

Inventory

Selling Cryptocurrency as inventory is complex and beyond the scope of this article (LIFO, FIFO, COGS, etc.)

FinCEN 114 for Virtual Currency

When virtual currency is being held in a foreign financial account or something similar and there is no other currency (such as euros) held within the account, then the account is generally not reportable. It is important to note, that if there is any currency held within the account outside of virtual currency, then the account may become reportable.

As provided by the IRS in pub 5569:

• • • “Example:

      • A foreign account holding virtual currency is not reportable on the FBAR (unless it’s a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). These funds aren’t reportable at this time, per FBAR regulations issued by FinCEN February 24, 2011, but FinCEN Notice 2020-2 indicates FinCEN’s intention to propose amending the regulations to include virtual currency as a type of reportable account under 31 CFR 1010.350.”

Hybrid Foreign Accounts and FBAR

When an account is only virtual currency, then it does not have to be reported for FBAR at this time — but the same rule does not apply if it is a hybrid account in which it holds reportable assets in addition to virtual currency. For example, if a taxpayer exchanges their foreign virtual currency for pounds or euros within that account, then it may be considered a hybrid account that requires reporting.

FATCA (Form 8938)

FATCA is different than FBAR and can include additional foreign assets that are not reportable for FBAR. For example, a foreign asset that would be reported for FATCA purposes on Form 8938 is an overseas stock certificate — but this same stock certificate would not usually be subject to FBAR reporting unless it was held within an account. The question then becomes whether foreign virtual currency/virtual currency is considered an asset that is reportable on Form 8938. Since virtual currency is considered an asset — and there is no absolute exclusion from having to report virtual currency for FATCA purposes — chances are virtual currency would be a reportable asset on Form 8938.

PFIC (Form 8621)

PFIC refers to Passive Foreign Investment Companies. Many US taxpayers may find themselves subject to the PFIC rules simply because they own foreign mutual funds or other pooled funds. In the past few years, multiple crypto investment funds have been launched both in the US and abroad. And, if a crypto fund qualifies as a PFIC, then Form 8621 would be required (unless an exception, exclusion or limitation applies).

Notice 2020-2

Notice 2020-2 reflects the fact that FinCEN intends to amend regulations requiring virtual currency to be identified as a reportable account for FBAR purposes – and chances the IRS will extend the reporting rule to FATCA/Form 8938 as well.

• • • Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.