Cryptocurrencies, any digital and decentralized currency that relies on cryptography to prevent counterfeiting and fraudulent transactions, have been defined, but their standing as a useful tool, smart investment and their future tax status remains murky.. Cryptocurrency functions as both a currency and an asset so its final legal status as either will impact banking and taxes.
The Internal Revenue Service issued their guidance in 2014 stating flatly that for tax purposes, cryptocurrency is property. This stance subjected cryptocurrency to reporting and tax consequences that holding cash does not have. If you actually earn income in a foreign currency that’s another matter. According to the IRS, cryptocurrency should be taxed as the type of property it is in your possession. Crypto can be a capital asset, taxed like a stock at capital gains rates. Crypto sales would generate ordinary income if it is inventory and your business is selling cryptocurrency. As of now, taxpayers need to treat crypto like an asset and pay the proper taxes on it. However, the New York District Court will soon weigh in on this issue.
On April 10, 2018, plaintiffs filed a class action lawsuit under truth in lending laws against Chase Bank. The plaintiffs purchased cryptocurrency with credit cards. Chase charged fees as if these transactions were cash advances. Plaintiffs alleged that Chase’s fees were inappropriate on the customers’ purchases of cryptocurrency and not properly set forth in the credit contract. Chase filed a motion to dismiss arguing that crypto is cash; therefore, the purchase of cryptocurrency is a cash advance and the fees were included in the credit card. The plaintiffs have continued to fight the motion to have the judge declare crypto an asset.
Chase’s argument cannot co-exist with the IRS’ position. Either crypto is an asset or it’s currency. This case will be one of the first to have a judge rule on crpto’s status. If it progresses through appeal, the Second Circuit could provide either powerful confirmation or persuasion against the IRS’ position. As tax appeals occur and make their way through tax court and up to the circuits, the IRS could find itself facing some unfriendly precedents.
For now, every holder of cryptocurrency must report their transactions on their tax returns. As lawmakers’ understanding of crypto evolves, so too will the rules and regulations which govern it. The attorneys at Leonard Sciolla keep abreast of all changes affecting our clients. With such a new and ever changing asset class, it’s important to get tax advice from a lawyer. If you need tax counsel from an attorney, call Robert Atkins at (215) 567-1530 or contact him through our website at www.leonardsciolla.com.