Cryptoassets: What to keep in mind in 2022.

• Author: Kanter, Matthew

Over the past several years, the world has seen the rise, fall, and multiple evolutions of cryptocurrencies and other cryptoassets. In 2021, the price of a bitcoin briefly topped $64,000, a collection of Beeple's artwork sold for $69 million as a nonfungible token (NFT), trading cards became virtual through sites like NBA Top Shot, and one of the largest virtual currency exchange platforms became a public company.

Regardless of an adviser's valuation or opinion of these blockchain technologybased assets and their potential for future skyrocketing appreciation or bubblebursting decline, it is clear that cryptoassets are here to stay, and tax advisers need to be ready as more and more clients begin to engage in transactions involving these types of assets.

Coming into the filing season for 2021 returns, here are four things for financial and tax advisers to keep in mind when working with clients holding cryptoassets.

How the IRS views and treats virtual currency

The first important thing to be aware of is the IRS's general understanding of these assets. In Notice 2014-21, the Service defines "virtual currency" as "a digital representation of value," other than a representation of the U.S. dollar or a foreign currency ("real" currency), that "functions as a medium of exchange, a unit of account, and/or a store of value." Some virtual currencies are "convertible," which means that they have an equivalent value in real currency or act as a substitute for real currency.

In the IRS's view, then, virtual currency is not recognized as traditional currency like the dollar or euro. When an individual exchanges a piece of virtual currency, he or she is exchanging a unit of property and is taxed accordingly. More recently, the IRS has been moving to refer to all forms of virtual currency and other virtual assets simply as digital assets.

As these assets are classified as property, they are not subject to wash-sale rules under Sec. 1091(d). This may allow for taxpayers to manage recognized gains in a given year, as some of these assets may be quite volatile in either direction throughout the course of a year.

It should be noted that Congress does have its eye on this aspect ofcrypto-assets, and the Build Back Better Act, being debated at the time of this writing, contains a provision that would specifically subject cryptoassets to the Sec. 1091(d) wash-sale rules. If the provision is enacted, this potentially could create a substantial administrative...