The biggest crypto news in 8 ½ years!

Eight and a half years ago I wrote a blog about the taxation of cryptocurrency. It outlined the basic tax treatment and was a helpful guide for clients. But all of that changed last week when the Securities and Exchange Commission (SEC) issued new guidance.

Previously: crypto assets were treated as securities and were subject to SEC oversight. This became problematic for some crypto projects (XRP, etc.) as they had to battle the SEC in court over their status as a security.

Here’s the high-level breakdown of the new classifications:

• There are now 5 categories of crypto assets that are based on their uses, characteristics, and functions.
  1. Digital commodities (BTC, ETH, DOGE, XRP, & 12 others)
  2. Digital collectibles (NFTs are the primary example)
  3. Digital tools (typically used for a practical purpose in the crypto space)
  4. Stablecoins (designed to remain stable in price)
  5. Digital securities (if it acts like a security, it’s a security)
• 4 of the 5 categories are not considered securities, but a crypto asset could be treated in a way that they makes it a security.
• This guidance is not yet final.

Tax implications:

• The IRS has yet to issue specific guidance on the 5 categories.
• Based on what we know of the treatment of commodities, collectibles, and securities:
  1. Capital gain and loss rules still apply
  2. Staking and other rewards are still ordinary income
  3. This is the same as it was prior to the new classification
• Tracking basis is still crucial and is complicated by the ease with which crypto assets can be moved between exchanges and wallets

Big picture thoughts:

• This will increase adoption and use of crypto assets as the threat of SEC action is greatly reduced
• There will be further clarifications both on the 5 categories and their tax treatment.
• Wall Street will be much more comfortable with involvement with crypto assets.

Having trouble falling asleep? Here’s the full SEC paper on the new changes.

Interested in learning how we can help bring clarity to your total financial picture? Reach out to one of the Tax Strategists at Management Accounting today to learn more.

Book a call to find out more!

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