Crypto Taxes: What you need to know when filing for your businesses

Written by
Lamis Abdeladhim
Posted on
May 17, 2022
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Tax season is over, but for those of you who missed it — no need to panic- you can still file for an extension and you'll have until the 15th of October to make things right. In case you might have any questions concerning declaring your crypto- we had an AMA session on Twitter Spaces with Shehan Chandrasekara — Head of Strategy at Cointracker also known as  "The crypto CPA" on the 29th of March. During this session, we had an interesting conversation about crypto taxes and best practices to stay in compliance with the newest regulatory updates.

Multis: Can you tell us what's new in 2022 when it comes to reporting your crypto to the IRS?

Shehan Chandrasekara: There are some minor changes since last year:  The IRS has clarified the crypto tax question on the front of the 1040-form. Mainly, if you are only holding crypto,  you don't have to check yes for that question. Other than that, things remain the same — you have to pay capital gain taxes on crypto and NFTs.

To learn more about filling out the 1040 form, see this guide on how to answer the crypto tax question.

Multis: If your company gets audited, what should they expect?

SC: First of all, don't panic when you hear "audit". What the IRS does is that they send you a notice of "Correspondence Audit". The document often indicates that the taxpayer has underreported expenses or the IRS is requesting to see proof of requested expenses. These audits are quite common and are part of the tax paying process.

However,  there is another type of audit where you have to go to the IRS and talk to an agent and then they will be digging into your bank accounts. Those audits are for very complicated cases and only occur if you fail to pay millions in tax money.

Multis: Some companies prefer to make payments in stablecoins. What are the implications of paying your employees in stablecoins from both employer and employee perspectives?

SC: The employee side is very easy, if I receive  100 USDC for my paycheck, that's a taxable event. From the employer's side, that 100 USDC is subject to self-employment tax. You might also have to do federal and state tax withholding depending on where your business is registered. Pretty much you can treat the 100 USDC as if it was in USD. It is subject to the W2 reporting or you follow the independent contractor rules.

You can find more information on declaring income from stablecoins here.

Multis: A lot of Multis users are in fact DAOs. As these organizations go mainstream, how should they approach taxation?

SC: There is no correct answer because every DAO is set up in a different way and a DAO can be a lot of things. Some DAOs look like partnerships for tax purposes, some look like C Corporations and some are just hobbies- essentially a group of people doing something together. In that case the DAO can be more or less a non-profit.

If your DAO is set up as a Wyoming LLC and if you have partners it will most likely be taxed as a partnership unless the DAO elects to be taxed as a C corporation.

You can find more information on how DAOs are taxed in this article by Cointelegraph.

Multis: What about the contributors? If you are a DAO contributor and you receive governance tokens, is this a taxable event? Do they need to be reported to the IRS?

SC: In this case, you are offering your services to the DAO and receiving something in return. It is considered wage income. Wage income is a taxable event at the time you receive it.

Multis: What would the taxes look like when we talk about NFT creators? If say, you are minting and selling them for income.

SC: If you are minting and selling NFTs, that means you are running an NFT business. In other words, you have to pay income taxes whenever you sell them and receive the token you're selling them for. Another taxable event for you is when you receive royalties. This means that you can deduct business-related expenses: home office expenses, subscriptions, and utilities. You'll pay tax on the net income of your NFT sales.

According to the IRS, any advertisement that helps spread the word about your business is an advertising expense and can tax deductible for small businesses. You could argue that giveaways are advertising expenses. However, you can't report 1,000,000,000 in advertising expenses and only make 100,000. The IRS will raise a red flag and ask you questions.

For more information on paying taxes on NFTs- as a creator or an investor- check out Taxbit's guide. You can also see some of the top NFT tax pitfalls to avoid in this Forbes guide written by Shehan.

Multis:  NFTs are largely used as airdrops and incentives which makes us wonder, is it true that gifting crypto is tax-free when it's less than $15K?

SC: The 15,000 dollar threshold is important to know. If you give somebody below that amount, you don't have to do anything or report anything to the IRS. If you give more than 15,000 dollars, neither party has to pay taxes however you would have to fill form 709 with the IRS stating that you gifted this specific asset at this specific value.

Multis: Speaking of gifts, are donations to blockchain-based charities taxable in the same way that they are when given to charities in fiat?

SC: It is a tax write-off only if it is a U.S charity, meaning that it is a US 501(c)(3) organization. If the charity is based outside the US and isn't registered as a non-profit, you don't get a tax deduction.

For a listing of non-profits accepting crypto donations, you can consult the GivingBlock's directory.

Multis: Moving on to some best practices, what's the data you need to keep in mind if you want to track your crypto taxes manually?

SC: For tracking manually you would need to know the date of the transaction, (purchase and sales), the price of the token or NFT purchased, the capital gain, transaction fees, and exchange fees and you have to use the right method for accounting (FIFO or LIFO).

However, this is a very long process and it shouldn't be done manually.

You can learn more about how Multis can allow users to track their assets across multiple chains and centralize this information here.

Multis: What qualities should crypto businesses look for in their CPA?

SC: First of all, you need to find a qualified person — a CPA, or an enrolled agent. If that person has crypto, that's a really good sign because they are involved in the space and know how to deal with these ambiguous regulations. Second, you should ask them questions: like "how many crypto clients do you have", or "can you give me a quick overview on how crypto works." and try to engage in the conversation.

Check out this thread from Shehan on what to look for in a crypto fluent CPA.

Multis: If you haven't filed taxes on your crypto and it's been a few years. What can you do to fix it?

SC: You have to go back and amend your returns but you need to see an accountant because there are some situations where you don't need to amend and if you do, you would be raising a red flag.

For a deep dive into crypto taxes check out Laura Shin's interview with Shehan on taxes on the Unchained Podcast.

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