Dealing with the “tax headaches” of taxing cryptocurrency

By Jessica Salerno-Shumaker, OSCPA senior content manager  

While taxing crypto might seem straightforward on the surface, one expert said it can be more complicated than it appears.  

“How do you actually tax an instrument if you don't have accurate valuations?” said Sean Stein Smith, CPA, professor at the City University of New York, Lehman College. “For NFTs, any tokens that are newly issued or any tokens that are not traded, all that creates tax headaches. We must be able to have those conversations with a client and, at the very least, have the plan to address it.”  

Smith will present at the MEGA Tax Conference on Dec. 13-14, covering what happened at the now-collapsed crypto company FTX, income tax planning, and what’s on the horizon for cryptocurrency in terms of regulation and legislation. 

Smith said anytime a tokenized asset moves or changes ownership, that transaction creates an income taxable event. Smith said it’s crucial for accountants to understand those entrepreneurial clients can easily have crypto transactions that they might not even be aware of.  

“Even if you have clients who are upfront, transparent, well informed, and get all of their transactional history from their trusted third party, it is still quite a bit of manual work to transform that file into anything that can be used in an income tax conversation,” he said.  

Other news to pay attention to in the crypto space includes FASB research on how to allow accounting rules and accounting standards to link anything related to crypto on the books of companies at its current market value.  

“This is a huge step forward in the right direction to add some more transparency and comparability for firms that are in this space,” Smith said.  

And while the IRS has not made any public changes to how it treats crypto or analyzes crypto, Smith said it’s clear the organization is paying close attention to the crypto landscape.  

“Now the IRS has tweaked the question on the front page of everyone's 1040, I believe it's the fourth tweak in the last three annual periods,” he said. “It's obviously an area of high priority for them.”  

In the future Smith predicts more regulations will come for cryptocurrency, although it remains to be determined what governing body will give those regulations.   

“It's almost guaranteed that in the upcoming 12 months, there is going to be a bill or an act, or some other type of rule put forward and passed into the marketplace,” he said.   

Hear more from Sean Stein Smith and register for the MEGA Tax Conference now.