Paying Taxes in Cryptocurrency May Trigger More Taxes; Rob Wood Explains
Though cryptocurrencies are relatively new in the financial world, they have become part of the financial landscape. Crypto is gaining recognition every day, and it may move into another level of acceptance thanks to a Arizona Senate Bill 1091. If the bill becomes law, it would permit the payment of taxes in cryptocurrency. However, paying taxes with Bitcoin or some other cryptocurrency could generate additional tax liabilities. Tax lawyer Rob Wood explains the situation in this report, one he also discussed in his article, “Paying Tax in Crypto Ironically Triggers More Taxes - Expert Take.”
Wood explains that the Arizona bill would allow the Arizona Department of Revenue to decide which cryptocurrencies it would approve for tax payment purposes, and these currencies could be used to pay Arizona taxes. This would put Arizona on the cutting edge with respect to recognizing cryptocurrency as money. The IRS presently does not accept cryptocurrency in payment of taxes. In addition, the IRS has taken a position with regard to cryptocurrencies that could generate tax liabilities: the IRS view is that cryptocurrencies are property, not money.
Wood notes that the states “almost invariably fall into line with the IRS.” The result of that could be that paying taxes with cryptocurrency could trigger more taxes. The key question would be, when did the taxpayer acquire the cryptocurrency? Wood suggests a hypothetical situation where a taxpayer pays $5,000 in taxes using $5,000 in Bitcoin. If the Bitcoin had been purchased on the same day as the taxes were paid, there is no problem. “There shouldn’t be any gain or loss.” But what if the Bitcoin had been purchased earlier for $1,000? Well, under the rule the IRS applies, there would be a $4,000 gain that would trigger a tax liability for the year in which the payment is made. This taxable gain problem might catch some people by surprise.
Wood believes that the Arizona bill will pass and that Arizona won’t be the last state to accept cryptocurrency to pay taxes. But for now, transactions involving cryptocurrency need some careful thought by taxpayers.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.