What Are Restricted Crypto Options? Tax Expert Rob Wood Tells What You Need to Know
Everyone has probably heard of stock options, though we may not all know quite what they are. In today’s world, cryptocurrencies are entering the investment picture, and some companies are using crypto to create employee incentives in much the way they might do it with stocks. Why does it matter? Tax lawyer Rob Wood explains what it all may mean to employees and what tax issues may arise. He also discusses the subject in his Cointelegraph article, “Taxes on Restricted Crypto and Options Can Be Confusing: Expert Take.”
As a starting point, Wood points out that the IRS treats cryptocurrency as property for taxation purposes. That’s why the rules relating to stock options apply to crypto options. There are basically two types of compensatory stock options that apply to employees: qualified stock option, also called an incentive stock option (ISO), and everything that is not an ISO.
The IRS treatment of options is to assess tax not when the option is acquired but rather when it is exercised. Wood notes that this is not surprising. For example, you get an option to acquire, one year from now, a specific crypto currency at today’s price. Since there’s no way to know what the price will be in a year, the option to acquire may be very lucrative or worthless. That’s why the IRS waits to tax any profit involved until the option is exercised. If the crypto is selling at $1 when you get the option and at $100 a year later when you acquire it, the IRS will tax the $99 profit you made.
So when should a taxpayer report receiving the option on a tax return? Wood says that someone in this situation should get some advice from a tax lawyer or CPA before making any decision on the subject. If the taxpayer is an employee, it may be that the employer’s plan document will contain valuable information. For an employee, the exercise of the option may trigger some tax withholding by the employer. If you are exercising an option to purchase crypto under some sort of option from your employer, be careful what you are doing and get reliable tax advice to be sure you don’t make reporting mistakes.
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.