Cryptocurrency holders, the IRS is paying special attention to you. You need to be aware of your tax liabilities and responsibilities. This article provides a general overview and next steps for IRS compliance.
As most of you know, Bitcoin was introduced to the world in 2008, and at the time Bitcoin, and other cryptocurrencies, were not on the IRS radar. It was a couple of years after Bitcoin emerged before the IRS began to focus on the on again, off again, cryptocurrency world and cryptocurrency transactions. For a long time, the IRS only stated cryptocurrencies should be treated as a sort of “stock” or “trading commodity”.
Years later, the IRS started to catch up and released official statements on cryptocurrencies, but the IRS uses the term “virtual currencies”. IRS Notice 2014-21 states “virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value”. IRS Notice 2014-21 is one of the most important IRS documents related to cryptocurrencies and the frequently asked questions (FAQs) are an excellent resource to answer cryptocurrency tax liability questions.
As time progressed, and cryptocurrencies soared to all time highs, the IRS could not ignore that they were losing tax dollars in the form of capital gains on cryptocurrency investments. The IRS recognized cryptocurrencies were not only growing, they were here to stay. After many inquiries, in July 2019, the IRS sent out an estimated 10,000 letters to individuals that they believe owned cryptocurrencies.
To put this in perspective, Coinbase has approximately 35 million customer accounts and the number of taxpayers that reported trading in cryptocurrency in the past years has only been in the hundreds. This is a gap the IRS is trying to fill.
Reporting Your Cryptocurrency Holdings to the IRS
As a cryptocurrency user, how and what do you need to report the IRS? The short answer is you are required to report all cryptocurrency transactions to the IRS. Let’s discuss this in more detail as there is a lot of confusion on this topic.
Sales are not the only form of a taxable cryptocurrency transaction. You need to report transactions of your cryptocurrencies if they are sold for cash, traded for another cryptocurrency, or used to buy something. The good news is just transferring coins from a wallet to an exchange or vice versa, is not a taxable event. Nor does it count if you just buy and hold on to cryptocurrencies. Neither of these transactions are taxable.
As stated earlier, the IRS defines cryptocurrencies as property, which makes them capital assets that give rise to capital gains and capital losses after they have been used. If the cryptocurrency has been held for a year or less, it is considered a short-term gain/loss and if more than a year, it is a long-term gain/loss. For most of us, this means a 15% tax on the gains. But, if you make a lot of money, $425,000 for individuals, you pay 20% tax on gains. Short-term gains are, as always, taxed at regular income rates according to your circumstances. In the Virtual Currency Tax Fairness Act of 2020, capital gains taxes are exempt in situations where the individual transaction gains are $200 or less.
Capital gains and losses are not the only cryptocurrency tax considerations. For examples, gifts of cryptocurrency to charity, friends, and relatives are all treated like gifts of stock. Also, like-kind exchange doesn’t work for cryptocurrency after 2018 because of the new policies regarding real estate swaps.
Cryptocurrency Exchanges Do Not Provide 1099-B Forms
With all this being said, when preparing your 2019 taxes, IRS Schedule 1 will ask every American taxpayer the following:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
As cryptocurrency exchanges do not provide a 1099-B, it is up to you to track and report your individual gains and/or losses. The next section provides important for tax preparation.
Document, Document, Document.
To successfully prepare your taxes, you should record the following for every cryptocurrency transaction:
- the date and time each unit was acquired,
- your basis and the fair market value of each unit at the time it was acquired,
- the date and time each unit was sold, exchanged, or otherwise disposed of, and
- the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.
Recording your transactions will make reporting to the IRS much easier for you, and your tax preparer if you have one.
To sum it all up, the IRS is paying attention and cryptocurrency is only going to increase and grow, so keep track of all your transactions! Taxpectations has years of experience filing tax returns for cryptocurrency investors, including the author of Blockchain or Die. Contact Taxpectations, or your tax professional with any questions or concerns.
Thank you and good luck preparing your 2019 taxes.
Eric Guthrie, Esq. is the author of the book Blockchain or Die and a Partner in the Cogent Law Group in Washington DC. www.BlockchainoorDie.org
Wendy Cassera is the Owner of Taxpectations and specializes in cryptocurrency tax preparation. www.Taxpectations.com
