written on behalf of Feigenbaum Law
Throughout 2021, cryptocurrency (“crypto”) continued to make headlines and assure skeptics that virtual currencies such as bitcoin are relevant in the global financial market, even as they continued to experience volatile swings in value. Meanwhile, the emergence of non-fungible tokens (“NFTs”) have created a new intersection between art, sports, and commerce.
As we prepare to close out 2021, we wanted to take a look at where crypto stands in relation to areas such as sports and entertainment, personal tax planning, and business. There are many people who may have gotten involved in crypto without considering whether there are any tax considerations or whether money held in a “virtual wallet” can be shielded from the US Internal Revenue Service (IRS) or the Canada Revenue Agency (CRA). Overall, it’s risky to hide any type of asset, including virtual ones. This blog explains how governments in both the United States and Canada have approached crypto taxation while looking at how crypto has continued to grow its presence in peoples’ everyday lives.
Americans should be prepared to disclose crypto income on their tax returns
As tax season nears, most Canadians and Americans might be starting to consider how and whether any crypto they made will be reported when they file their annual returns. In the United States, the IRS announced it is looking for people who made money off crypto to declare so on their 1041 tax form. This isn’t new, but tax forms look different this year as the IRS continues to shape its approach to crypto.
The updated 1040, which taxpayers use to report individual income, has a line that asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The question differs slightly from last year’s 1040, which asked “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
A story published by CNBC says qualifying transactions would include being paid for work or goods in crypto, receiving crypto for free, converting crypto to cash, buying goods or services with crypto you already own, and more. Ultimately, people who deal with crypto should check with a professional when preparing their taxes.
On the other side of the border, the CRA stated that it treats crypto as a commodity for purposes of the Income Tax Act. Income that arrives in your bank account as a result of selling crypto can be expected to be treated as business income or a capital gain, and transactions made with crypto can be taxed similarly to how other bartered transactions are handled by the CRA.
While most people may not have crypto assets to take into account when doing their taxes, that’s likely to change over the next few years as alternative currencies continue to grow in stature.
Getting paid in crypto is no longer a strange idea
Most people who receive paycheques from their employer receive that income in the currency of the country they live in. However, a story published by CNBC states that a growing number of people have begun to elect to be paid in crypto, or in some situations, have jobs where crypto is the only method of payment available.
The story mentions a college student who works for a company that created a mobile app. He told CNBC that he gets paid in crypto, and that he ultimately ends up making about the same amount of money as he would if he was paid in traditional currency, adding that there is plenty of fluctuation when it comes to letting crypto sit before converting it into dollars.
With the increase in the “side gig” economy and the rise in decentralized employers such as those who make apps or who have employers spread around the world, the popularity of using crypto as payment currency will likely grow in the years to come.
How do NFTs fit into the mix?
Non-fungible tokens, or NFTs, are another type of asset that almost nobody would have been aware of just a few years ago. An NFT is a unique digital item, such as a digital painting, a tweet, or anything else represented online. An NFT is different than something like a picture that is downloaded because it has a unique identifier and can be tracked. Think of the JPGs as you would prints of paintings and an NFT as the Mona Lisa itself. Many NFTs are purchased using crypto, and as such, are causing legislators to consider how to treat them when it comes to taxes.
Simply put, if crypto is used to purchase any asset, including NFTs, Americans could face capital gains taxes. Additionally, the sale of an NFT in exchange for crypto can also have tax implications. Similarly, in Canada, the purchase of an NFT can be considered equal to the purchase of a physical piece of art and treated similarly for tax purposes.
Allow Feigenbaum Law to provide you with skillful corporate tax planning strategies
We recognize that tax planning is essential to any personal or corporate financial plan. We help individuals and organizations make well-informed choices intended to lower their tax burdens, avoid costly penalties and pitfalls, and ensure that they have a plan for long-term financial security. Whether you keep your assets in traditional forms or have ventured into the world of cryptocurrency, the highly experienced tax team at Feigenbaum Law can provide you with full tax services on both sides of the American-Canadian border. Contact us online or call us at 877-275-4792 to see how we can help you today.