The Internal Revenue Service (IRS) issued its first guidance on cryptocurrencies—or “virtual assets”—in 2014, where it concluded that virtual currency transactions will be treated as property for federal income tax purposes. It took the IRS about five more years of issuing additional releases before it officially included the following question for taxpayers to answer in their Forms 1040: “At any time during [the taxable year], did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

If you need assistance reporting your crypto transactions, you could benefit from the services of a crypto tax lawyer. That said, before hiring the first crypto tax lawyer who claims to be experienced in such a field, taxpayers need to conduct their due diligence and ensure to ask crypto tax questions. This article explains the key questions you should ask every crypto tax lawyer before deciding which lawyer to hire. 

Ask Before You Hire 

Before you hire a crypto tax lawyer to help you handle your crypto transactions, be sure to ask them the following questions:

1. What federal compliance obligations apply to me and my crypto business?

Before hiring a crypto tax lawyer, make sure you ask questions about their knowledge in the area of digital currency as well as an overview of the general compliance obligations that may apply to you and your cryptocurrency-related business. While you should assess the knowledge of your attorney, watch out for certain red flags such as attorneys that claim to know everything about cryptocurrencies and that claim to be experts in the field. Since there is no comprehensive legislation or “crypto law,” federal agencies and the courts are relying on already-existing statutes for their investigations. As a result, the best crypto tax lawyers are those that can understand already-existing statutes and apply them to your cryptocurrency transactions.

2. Do I have any other federal compliance obligations other than IRS tax reporting requirements?

In addition to the multitude of tax reporting obligations for “virtual currency” transactions, your business could also be subject to SEC provisions and FinCEN rules. For instance, if you are issuing tokens, you will have registration obligations with the SEC. if you are engaging in money transmitting services, you may need to be licensed as a money transmitter under FinCEN and design and implement an AML Compliance Program under the Bank Secrecy Act (“BSA”). Ask your attorney if the facts of your case imply any of these additional obligations and, if so, how they plan to address them.

3. I am planning to launch an ICO. What are my tax reporting obligations?

An ICO is an initial coin offering. This occurs when a company or individual(s) launches a new coin or token to fund a project or development. The purchasers typically buy the coin or token with fiat currencies or other cryptocurrencies. ICO income is reportable and taxable. An attorney experienced in cryptocurrencies should be able to advise you on whether—if at all—you will need to register your coin/token as a “security” under the federal securities laws. In doing so, your attorney may be able to structure your coin/token as a “utility token”—which is not a security and does not have to be registered—as opposed to a “security token”—which is a security and does have to be registered.

4. Can you help me organize the income from my mining company?  

If you operate a mining business, securing an experienced crypto tax attorney is imperative for tax purposes. Crypto mining businesses are unique in that they are subject to two taxable events: (1) first at the time the coin is mined, which is reported as ordinary income, and (2) second at the time the coin is sold or otherwise disposed of, which is reported as a capital gain or loss. This is a very complicated tax reporting process and one that you should ask your crypto tax attorney to explain in detail to you before you hire them.

5. Can I get any deductions for my crypto mining business?

Ask your tax attorney if your crypto mining business—or other crypto-related business—can receive the usual business deductions under Section 162 of the IRC. Your attorney should be able to outline the most applicable deductions for crypto mining companies, for instance. This includes, at a minimum, equipment, office space, rental, electricity, mining pool fees, and office supplies.

6. Is there a way for me to get more deductions or preferential treatment for my crypto transactions?

In addition to searching for the usual business deductions or other typical tax deductions and credits, a good crypto tax attorney has a solid understanding of the tax code and uses it to apply additional deductions and credits to your case. This may involve setting off your capital losses against capital gains and some of your ordinary income to lessen the overall tax liability.

7. Is my crypto income best classified as investment income, rental income, or interest income?

This is a debatable issue and one that your crypto tax attorney should explain to you in detail. While income generated from crypto-related activities could be investment income, it could also be rental income (if treated as income from the property since cryptocurrencies are treated as “property”) or interest income (if treated as similar to interest earned on a savings account). This distinction is important because it affects the way income is reported. 

8. I deal with international cryptocurrency transfers and foreign exchange. How does this affect my tax reporting obligations?

Your attorney should have a firm grasp of not only domestic crypto transactions but also international and cross-border transactions. This is very important for cryptocurrencies since it is very easy to transfer cryptos to foreign accounts across international borders in a matter of seconds. Also, many online crypto exchanges are foreign exchanges; therefore, you may have obligations under FinCEN to file FBAR forms or forms that list whether you had any foreign currencies brought into the United States. If this applies to you, make sure your crypto tax attorney can explain this to you.

9. Do you hold cryptocurrencies?

This question may sound strange, but it is an important one. Use this question and the attorney’s answer to gauge their enthusiasm about cryptocurrencies. If your attorney does not own, invest, or otherwise deal with cryptocurrencies other than for clients, their inside knowledge can only extend so far.

10. Can you describe your experience in providing compliance advice and tax services for crypto businesses?

Make sure your crypto tax attorney has experience providing services in this novel area. Although this is still an emerging area with little known and inconsistent federal regulation, you would still want to secure the services of an attorney who has had some experience in helping clients with blockchain and cryptocurrency compliance. This is especially important when it comes to the tax reporting of crypto transactions.

“Reporting your crypto tax transactions is one of the most complicated areas in one´s tax return. Done falsely, the IRS could initiate a protracted audit or investigation and issue fines and penalties not to mention the reputational damage it could do to your business. To ensure that you are properly reporting your crypto transactions, you need a crypto tax lawyer.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Conclusion 

Reporting cryptocurrency transactions is something many taxpayers struggle with. This has led to an increase in IRS investigations for failing to report or for falsely reporting cryptocurrency transactions. Crypto fraud and filing false—or failing to file—tax returns are serious charges that can lead to irreparable reputational harm and fines and penalties. Before you make the decision and choose a law firm and a crypto tax lawyer, be sure to do your due diligence. This includes asking thorough questions about your attorney’s knowledge, experience, grasp, and passion for cryptocurrencies and tax law.