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Strategies to navigate IRS guidelines on cryptocurrency

Eric L. Pierre, CPA and CEO of Pierre Accounting, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss the IRS’s guidelines on cryptocurrency earnings this tax season.

Video transcript

KRISTIN MYERS: Now everyone is looking to cryptocurrency, as we see huge run-ups in Dogecoin. And Bitcoin was hitting some record highs just recently. We want to make sure that you are protected when Uncle Sam wants to collect.

So let's talk taxes and cryptocurrency. Now we're joined by Eric Pierre, CEO of Pierre Accounting. Eric, so what is the guidance that we have from the IRS, in how we should handle cryptocurrency around tax time?

ERIC PIERRE: That's a great question. And thank you for having me.

Now it's going to depend on how you acquired the cryptocurrency. So these days now, we have people that are paid in cryptocurrency for their services. If you are paid for your services-- so let's say I'm paid 100 coins Ethereum at $2,500, I would record that as $250,000 of income because that's what Ethereum is worth at that day.

And then if you're doing the buy and hold strategy, when you buy it you're taxed, to pay only when you sell it. So if I buy some Dogecoin today, say $1,000 worth, and I sell three months later for $10,000, I'm taxed at ordinary income at the $9,000 gain because it's less than a year versus the same coin.

Now, if I sell it a year and five days later for, say, $100,000, that $99,000 gain is taxed at capital gains rate, which the cap currently is 20%.

ALEXIS CRISTOFOROUS: So what if you have a business, such as selling NFTs or data mining, what should you know come tax time? What is allowable?

ERIC PIERRE: OK, so selling NFT, you can create an entity and treat it like a business. So if I were to sell, let's say a digital art of LeBron James dunking a basketball, like recently, for $200,000, I would record that as my gross receipt. But if I have current expenses created, such as buying the computer and the digital art, I can deduct it. As long as it's considered ordinary necessary expenses, to create that digital art, then I can deduct it against that income.

One thing to keep in mind is that, if you're into NFT, and you're not doing a trade or business, the IRS is looking to potentially treat that activity as a collectible. And the collectible tax is up to 20% for the high earners. And that's for single people at 441 and higher, and married for 96. So that's a little different from how they're treating the rest of the coins.

KRISTIN MYERS: Now Eric, when it comes to taxes, I think everyone is always looking out for loopholes. What you're saying seems to be fairly straightforward. Are there any loopholes, or specific tax laws, that perhaps folks that are dealing with cryptocurrency should be aware of or could potentially use?

ERIC PIERRE: Yes, that's the great question. Now, you can also create Roth IRAs and traditional IRAs with cryptocurrency, that allows you to defer tax or not pay tax, depending on how it's set up. It's a little trickier, but with the right brokerage and the right strategy you could have a Roth IRA with cryptocurrency. Or you can put all of in a traditional IRA, grow it tax free, and then pay the tax in retirement, with the RMDs, et cetera, et cetera.

ALEXIS CRISTOFOROUS: Before we let you go, I'm just curious about what counts as a deduction, when you're dealing with cryptocurrencies or NFTs?

ERIC PIERRE: Can you repeat that? My signal was compromised for a second. I apologize.

ALEXIS CRISTOFOROUS: Oh sure. No worries. What would count as a deduction, if you are dealing with cryptocurrencies or NFTs at tax time?

ERIC PIERRE: OK, that's a great question. Now, I know that if your data mining, you can deduct your electricity costs, you can capitalize your server, if you were to start data mining today.

I actually was looking into mining. But I got out of it because I was concerned about the electricity costs. But I could have capitalized a $10,000 server-- and if, for NFTs, if you're buying a computer And of course, if you're listed on sites for marketing, you can deduct those costs, as long as you treat it as a regular business.

KRISTIN MYERS: All right. Definitely some tips that everyone is going to want to take advantage of.

Eric Pierre, CPA, CEO of Pierre Accounting, thanks so much for joining us.