Introduction to Cryptocurrencies, An Article Series – #1 of 3

May 31, 2022

By Carlos Salgado, CPA, MSA – Supervisor, Tax and Ryan Lubinski CPA, CVA, Senior Manager

The evolution of today’s economies, governments, banking systems, and societies has led to the creation of virtual currency and digital assets. Many businesses and individuals are looking to expand their portfolios to include such assets. However, with these assets being so new, there is a lack of clarity in terms of tax treatment and financial reporting. At MichaelSilver, we have a team dedicated to staying up-to-date with the latest guidance and we want to share with you some of our insights.

Our Silver Advantage Alerts on cryptocurrency will cover the following topics:

  1. A beginner’s guide (introduction) that defines and explains how to invest in cryptocurrency
  2. Tax implications of cryptocurrency transactions
  3. Financial reporting implications of cryptocurrency transactions

This series of articles will be released over the next few months, each building upon the previous. In this first article, we will cover introductory material for newcomers to the world of cryptocurrencies.

What is Cryptocurrency?

In their original form, Bitcoin and other cryptocurrencies were ledgers maintained by users through blockchain technology. Since then, cryptocurrencies have evolved and now also represent various technologies. In general, ownership in cryptocurrency represents ownership of a network. However, some other forms of currencies have different structures. One example, NFT (Non-Fungible Token) is a token that is not readily traded on crypto markets and represents ownership of a unique digital asset, such as a piece of art. The IRS does not consider cryptocurrency to be a currency but instead treats it as property. We will discuss the implication this has in the second issue of this series that focuses on taxes, while financial reporting implications will be covered in the third issue.

How to Invest in Cryptocurrency

In general, to acquire cryptocurrency, an individual or business first opens an account with a virtual currency exchange such as Coinbase, Binance, Crypto, Nexo, etc. These exchanges are akin to brokerage accounts with cryptocurrency. They facilitate the purchase of the currencies and allow you to hold them in an account referred to as a “wallet.” The wallet is where the virtual currencies and other digital assets are held. There are also “cold wallets” that serve as external storage for the digital assets not held via the internet. Certain types of virtual currencies may be purchased with USD, while other types of virtual currencies must be purchased with other coins. We will visit this topic in more detail in the next issue of this series along with the tax and financial statement implications.

There are also alternative ways to obtain cryptocurrency. For example, certain virtual currencies can be “mined.” This means you dedicate computer process power towards the creation of new assets and are rewarded virtual currencies in return. Certain new currencies are also “airdropped,” which means that these assets are given for free, often to promote the usage and trade of the currency.

If you have any questions about cryptocurrencies, please contact your MichaelSilver professionals at 847-982-0333. We’re happy to help. Please look to your email over the next few months for the second article of this series.

Carlos Salgado, CPA, MSA – Supervisor, Tax, works with mid-size enterprises focusing on flow-through taxation within a variety of industries, including, manufacturing and distribution, professional services, real estate, and retail. He has provided accounting and tax services for over six years, including compliance, tax planning, and management consulting. Carlos is a member of the AICPA and ICPAS.

Ryan Lubinski CPA, CVA, Senior Manager, has over ten years of accounting, auditing and business valuation experience working with businesses in a wide range of industries including manufacturing, automobile dealerships, retail, investment companies, holding companies, and employee benefit plans. He has been one of the key leaders of our team of accounting and assurance professionals.

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