Digital asset investors embrace a bullish optimism

As a seasoned tax professional with over two decades of experience under my belt, I can confidently say that the digital age has brought about some fascinating changes in the world of taxes. One such change is the emergence and growing popularity of cryptocurrencies like Bitcoin, Ethereum, and many others.

People became increasingly hopeful and positive about investing in digital assets as they anticipated pro-cryptocurrency policies from the newly elected Donald Trump administration. As a result, the price of Bitcoin (BTC) has been rapidly increasing since his presidential victory this month, reaching several significant highs on its path towards $100,000.

The fervor surrounding Bitcoin has returned, as its price soared past $98,800 on Nov 21, reaching a new high, following the announcement that Chair Gary Gensler of the US Securities and Exchange Commission will be stepping down on Jan 20, coincidentally the same day Donald Trump is due to take office. The Bitcoin craze is global and intense once more.

Bitcoin payments to sportsmen

As a researcher delving into the dynamic world of sports, I’m excited to share an extraordinary breakthrough in the UAE’s sporting landscape: the Bitball Flag Football showdown. This unique event marks the inaugural NFL gathering, bringing together some of the most celebrated figures in American football. Remarkably, these athletes will be compensated in Bitcoin.

Taking the forefront is Russell Okung, an NFL veteran with eleven years under his belt and a Super Bowl Champion, who is a strong proponent for athletes’ financial independence. Moreover, he was the first professional athlete to receive his salary in Bitcoin. George Mekhail, Vice President of Operations at BTC Inc., shared insights on this matter.

Our flag football game during the Bitcoin event isn’t just coincidental; it symbolizes the cooperation and tenacity of the Bitcoin community. Russell Okung’s initiative to equip athletes with Bitcoin is a visionary concept, propelling us further into public awareness. We’re honored to facilitate this mission at the Bitcoin Conference, adding purpose and thrill for our participants.

The star-studded lineup also includes over 22 football legends, such as Antonio Brown, Le’Veon Bell, Johnson Bademosi, Jurrell Casey, and Jared Evans. The roster further includes celebrated players such as Dez Bryant, Dontrelle Inman, Mohammad Sanu, Randell Johnson, Michael Thomas, Craig Robertson, and Wesley Woodyard, representing an array of talent from across the NFL.

At Bitcoin MENA 2024, taking place December 9-10, 2024, you’ll find Bitball Flag Football among the exciting side events! This massive gathering of Bitcoin investors, developers, and enthusiasts will be in Abu Dhabi, UAE. As a Bitcoin MENA ticket holder, you’ll get free admission to watch the Bitball Flag Football game live on December 10 at Al Nahyan Stadium starting at 7 pm. For those who wish to attend specifically for this unique blend of sports, technology, and digital assets, separate tickets can be purchased via PlayBitBall. These tickets will be accessible worldwide through live streaming on Bitcoin Magazine’s Rumble and YouTube platforms, giving global audiences a chance to experience the extraordinary fusion of Bitcoin and professional football, a significant cultural moment not just for the UAE but also the broader GCC region.

Digital asset taxation

Some good news for the Bitball Flagg Football players is that the United Arab Emirates has no income tax and has recently abolished value-added taxes on digital asset transactions. By exempting individuals and businesses from a VAT on the transfer and conversion of digital assets, the UAE has positioned itself as a potential hub for digital currencies (see Coincub Tax Report here). So, the players will not be subject to double taxation on their digital asset income in the absence of a UAE and the US Income Tax Treaty.

Despite the fact that they play for Bitball Flag Football, these players will still be liable for global taxes in the U.S., as their digital assets are considered property and are therefore subject to either income tax or capital gains taxation.

Digital assets taxed as income in the US

The Internal Revenue Service (IRS) offers instructions on determining if digital assets should be classified as income instead of capital gains. Transactions deemed as supplementary income, which are subject to income tax, encompass the following scenarios:

Getting paid in digital assets (such as the Bitball Flagg Football players).
Mining digital assets (on a hobby level).
Receiving an airdrop.
Receiving new digital assets from a hard fork.
Staking rewards.
Referral bonuses.
Earning interest through lending protocols.
Earning new liquidity pool tokens, governance, or reward tokens on DeFi protocols.
Learn to earn rewards.
Watch to earn rewards.
Browse to earn rewards.
GameFi rewards.

Digital asset taxation as an investment in the US

Investment digital assets are subject to varying tax rates, with short-term gains (less than a year) being taxed between 10% and 37%. On the other hand, if you keep a digital asset for more than one year, you qualify for long-term capital gains tax (over a year), which can be 0%, 15%, or 20% depending on your income and filing status. NFTs considered as collectibles may incur a 28% tax rate.

In simpler terms, if you experience losses from digital assets, these losses can cancel out any gains and lower your regular income by a maximum of $3,000 per year. Any remaining loss amounts can be saved for use in future tax years until they are completely utilized.

If you, as a cryptocurrency investor, experience the loss of your digital assets due to hacking, fraud, or misplacing your private keys, the IRS doesn’t allow you to claim this loss as a tax deduction. This means that if such an unfortunate event occurs, there is no remedy other than accepting the loss and considering it a write-off in your investment portfolio.

Digital asset tax breaks

As an analyst, I’d like to share some advantageous tax exemptions available for American digital asset investors, which can significantly reduce their tax burden:

Gifting digital assets under $18,000: You can gift up to $18,000 in digital assets per person tax-free (for 2024). This is known as the annual gift tax exclusion. This can help you take advantage of lower Income Tax rates in your household and pay less tax overall. If you gift over this amount, provided you’re under the lifetime gift tax exemption of $13.61 million in 2024—you won’t need to pay gift tax. However, you may need to file Form 709 (more on this below). For 2025, this increases to $19,000 with a lifetime exemption of $13.99 million.

Capital gains tax-free allowance: If you earned less than $47,026 in 2024 in total income (including your digital asset gains), you’ll pay no capital gains tax on long-term gains. For 2025, this increases to $48,350.

Long-term capital gains tax rate: If you hold your crypto for more than a year, you’ll pay a lower long-term capital gains tax rate of between 0% and 20%, depending on how much you earn.

How to report digital assets on tax returns

A digital asset owner files digital asset taxes with their annual tax returns by answering the IRS’s digital asset transactions question. A variation of this seemingly innocuous question appears at the top of Forms 1040, Individual Income Tax Return; 1040-SR, US Tax Return for Seniors; and 1040-NR, US Nonresident Alien Income Tax Return. The question was also added to these forms: Forms 1041, US Income Tax Return for Estates and Trusts; 1065, US Return of Partnership Income; 1120, US Corporation Income Tax Return; and 1120S, US Income Tax Return for an S Corporation.

The IRS asks this question with variations for corporations, partnerships, estates, and trusts:

During any point in the year, did you either receive digital assets as a reward, award, payment for goods or services, or sell, exchange, or dispose of them in any way? If so, have you reported these transactions on your digital asset tax report?” Yes or No. The checkbox suggests that they had such reportable transactions.

Report digital asset disposals, capital gains, and losses on Form Schedule D (1040) and Form 8949.

Report digital asset income on Form Schedule 1 (1040) or Form Schedule C (1040).

Please list your digital assets stored in foreign platforms like those in the UAE, for instance on an exchange, when filing FATCA Form 8938 and FinCEN Form 114 (Foreign Bank Account Report).

Digital asset tax disclosure deadline

In the United States, the tax year runs from January 1st to December 31st. The due dates for filing taxes on both traditional and digital assets are similar: it’s April 15th for most individuals. However, if you’re a U.S. expatriate investing in digital assets, you have an extended deadline of June 15th.

Filing for a tax extension using Free File or Form 4868 means you’re granted an automatic extension of the deadline to submit your taxes, which is now pushed back to October 15th.

Can the IRS and state tax departments track my digital assets?

Absolutely—tax authorities like the Internal Revenue Service (IRS) and state tax departments have the ability to monitor digital assets. The IRS has successfully pursued cases against exchanges such as Coinbase, Kraken, and Poloniex, compelling them to disclose customer information. Furthermore, the IRS possesses the capacity to investigate cross-border tax evasion.

In February, the Internal Revenue Service (IRS) brought its initial solitary cryptocurrency tax fraud case, resulting in Frank Richard Ahlgren III admitting guilt for submitting a falsified tax return that concealed profits from selling $3.7 million worth of Bitcoin. The case against Ahlgren, USA v. Ahlgren, marked the first instance where cryptocurrency tax evasion charges were not linked to another offense; it now also represents the first stand-alone crypto tax fraud case leading to a guilty plea. Ahlgren faces potential imprisonment for up to three years.

At the state level, Michael Saylor, a wealthy Bitcoin advocate and co-founder of MicroStrategy, has agreed to pay a $40 million settlement following accusations that he deceived authorities about his residency from 2005 to 2022, thus avoiding over $25 million in local income taxes through manipulated records and statements. This lawsuit claimed that he had committed significant tax fraud at both the local and state levels.

Ahlgren, Saylor, and the DOJ’s case against Roger Ver (also known as “Bitcoin Jesus”) highlights the determination of the IRS, State Tax Department, and DOJ in pursuing digital tax evasion cases. Earlier this year, the IRS announced that they would be focusing their audits on digital assets and high-net-worth individuals. Given these recent developments, owners and investors in digital assets might want to reconsider their tax reporting and filing duties to maintain compliance.

2024-12-01 15:18

Digital asset investors embrace a bullish optimism | Opinion