Who pays and who enjoys: cryptocurrencies under taxation
Have you ever found yourself constantly questioning what cryptocurrency is in terms of taxes, and still not getting? The tax code does not get it clearly either.
When you hold crypto coins, each move of yours triggers taxes. For tax purposes, transfers are treated as sales. Well, unless you can find some other way of transferring cryptocurrency tax-free. The fact that the Internal Revenue Service (IRS) marks crypto as property might prompt you to study the concept of ownership.
But, is crypto really yours, if you are holding it for someone else? In other words, if you are holding the crypto for the benefit of someone else, who has to pay the taxes?
You won’t be treated as the owner for tax purposes if:
— A written agency agreement is entered into with the agent contemporaneously with the acquisition of the asset;
— The agent functions exclusively as an agent with respect to the asset at all times;
— The agent is held out as merely an agent in all dealings with third-parties relating to the asset.
What if you don’t meet all three of these points? Fortunately, these factors are non-exclusive. Even an oral agency agreement might suffice, although if you’re in a tax fight, you surely want to have it in writing.
It means that the agent should not face taxes on income over which he has no control and no beneficial right. Meaning, a beneficial ownership is the “freedom to dispose of the accounts’ funds at will.” Courts may weigh factors including:
— which party enjoys the economic benefit of the property;
— which party has possession and control;
— the intent of the parties.
Let’s look at the example:
The taxpayer opened four bank accounts under his children’s names. He deposited money into the accounts but later withdrew it to facilitate his own business ventures. But he did not report any of the income they generated. In this case, the father was the beneficial owner, so he had to pay the taxes. “Our finding here is based on the identity of the true owner of the income-producing property. In such an inquiry, we look not to the mere legal title, but to beneficial ownership. It is command over the property or the enjoyment of its economic benefits that marks the real owner. When transactions are between family members, special scrutiny of the arrangement is necessary, lest what is in reality but one economic unit be multiplied into two or more," — reasoned the court.
Clarified by Robert W. Wood