Cryptocurrency
Receive expert guidance on navigating the tax implications and reporting requirements for your digital asset holdings.
“Timing can be everything when it comes to income taxes.”
Expert Cryptocurrency Tax and Compliance Services Tailored to Your Needs
The federal government is presenting a unified front to define cryptocurrency and digital assets as property, much like publicly traded securities, gold, and silver. The treatment of digital assets as property has several implications, including discouraging the use of digital assets as an alternative form of payment. This treatment also impacts how digital assets are taxed.
As such, digital assets have additional documentation requirements from an income tax standpoint, as well as unique features. Somerset Tax Partners, LLC assists clients with documenting transactions for mining activity, staking activity, trading activity, and exchanging digital assets for goods and services.
Service Overview
Cryptocurrency transactions often involve multiple types of activity such as mining, staking, trading, and exchanges for goods or services, each with distinct reporting considerations. Our services focus on organizing transaction data, supporting accurate recordkeeping, and helping clients apply the correct tax treatment to their digital asset activity throughout the year.
Mining
The fair market value of cryptocurrency or digital assets produced through mining is treated as taxable income at the time the asset is produced.
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The cash equivalent value is reported as income when mined
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That same value is recorded in bookkeeping as an asset (basis)
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Mining-related expenses may be deducted against income
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When the asset is sold or converted to cash, basis is subtracted from sale proceeds to determine taxable income
This approach ensures compliant reporting and helps avoid double taxation.
Staking
Staking rewards must be carefully tracked for tax purposes.
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Rewards are treated as taxable income, similar to interest
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The reported income establishes your basis in the rewards
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Cryptocurrency is taxed as a capital asset
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When assets and rewards are later sold, accurate basis records help reduce capital gains tax
Simply stated: the higher your basis, the lower the capital gains tax owed.
Trading
Cryptocurrency trading is taxed much like buying and selling stocks and bonds.
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The purchase price establishes your basis
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Capital gains or losses are calculated when assets are sold
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Applies to both day trading and long-term investing
Exchanging for Goods and Services
When cryptocurrency is used in business transactions, specific reporting rules apply.
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The cash equivalent value of digital assets is recorded as revenue
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The cryptocurrency is recorded as an asset on hand
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When the asset is later sold, capital gains tax is calculated based on the difference between sale price and basis
Service benefits
When you work with Somerset Tax Partners, LLC for cryptocurrency tax and reporting support, you gain:
Accurate documentation and reporting support for digital asset activity
Clear guidance on complex cryptocurrency tax rules
Improved compliance in a decentralized reporting environment
Reduced risk of errors, penalties, or double taxation
Professional insight aligned with current federal tax treatment of digital assets
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FAQ’s
Q&A With R. Joseph Ritter, Jr. CFP® EA
Q: How are cryptocurrency gains and losses taxed?
Cryptocurrency can be taxed either as ordinary income or as capital assets. Proper bookkeeping will determine the method of taxation which applies.
Q: What records do I need to keep for cryptocurrency transactions?
Record keeping includes minute-by-minute transaction detail and the cash equivalent value of each transaction. We assist our clients with organizing transactions for reporting on the tax return. In some cases, the broker will often provide transaction detail. However, you are responsible for record keeping of mining and staking activities. Even if the broker keeps a record of transactions, we recommend that you keep a detailed log for your own records, since digital assets by their nature are decentralized.
Q: How do I report cryptocurrency earnings from mining or staking?
Keep a detailed ledger by minute coins produced in mining activities. It is also important to record the cash equivalent of each transaction. A detailed ledger should also be kept by minute for staking rewards along with the cash equivalent. However, do not include information which identifies the coin or wallet.
Q: How can I ensure compliance with IRS guidelines for cryptocurrency transactions?
Document, document, document. With proper documentation, Somerset Tax Partners, LLC will prepare an income tax return which accurately reflects your digital asset activity. A common method for documenting transactions is a spreadsheet which tracks the original purchase date, price, and quantity; tracks any staking or other activity; and tracks the sale, exchange, or conversion to cash again using the date, price, and quantity.
Q: What are the tax implications of converting cryptocurrency to cash?
Conversions to dollar equivalents generally result in capital gain/loss treatment. Digital assets are entered into bookkeeping systems as assets. A conversion is essentially treated as a sale, and the proceeds minus basis equal the amount subject to capital gains tax.