US residents will face a new question on their tax forms in 2020, the IRS has proposed to include a disclosure of ANY crypto held on the very first page of the 1040 form all filers must fill-out. In fact it's the THIRD question right after Name and Address!

This question was already included on the 2019 tax forms, but in a location that not every individual would need to fill out. The Federal Government has been bleeding money and they are ramping up their collections to catch anything they can find. Which means that *everyone* will now be forced to disclose if they hold any 'virtual currency'

But what exactly do they mean of Virtual Currency? That's a specific term:

"Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.  Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency....Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes."

Yet the way the IRS has defined it, Crypto is not considered as income, it is considered property.

"Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency."

This means that you don't just add the value of your holdings to your general income and figure out your tax as normal. Crypto is taxed as Capital Gains and Losses.

"When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses."

Which is *much* more complicated. What you owe varies depending on if it's a long-term or short-term holding ...

"If you held the virtual currency for one year or less before selling or exchanging the virtual currency, then you will have a short-term capital gain or loss.  If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss.  The period during which you held the virtual currency (known as the “holding period”) begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency."


What if you HODL Bitcoin from 5 years ago (a long-term holding) but also just received some yesterday (short-term), they have different tax rates, how do you deal with that? Well, if you TRACK each INDIVIDUAL Bitcoin you can deifferient and choose which one was sold and pay the lesser tax, but you have to keep those records.

"You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units."

Part of how tricky that makes it means that you are responsible to pay the Capital Gains or Loss tax not only when you withdraw funds to fiat, but even if you are using your Crypto funds to pay for goods or services!

"If you pay for a service using virtual currency that you hold as a capital asset, then you have exchanged a capital asset for that service and will have a capital gain or loss...Your gain or loss is the difference between the fair market value of the services you received and your adjusted basis in the virtual currency exchanged.."

What is even worse if that if you EXCHANGE your Crypto for another property (another crypto) then you ALSO owe taxes from each and every exchange! Based from the value at the time of the exchange.... this could mean that the tax payer is responsible for keeping records of what the market value was based on the exact moment the exchange occurred.

"If you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss....If, as part of an arm’s length transaction, you transferred virtual currency to someone and received other property in exchange, your basis in that property is its fair market value at the time of the exchange"

So what about Crypto that you received for free? Like a fork happened and you received an Air Drop? .. yup, owe taxes on that too!

"If a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you receive that cryptocurrency....When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency."

If you traded Crypto peer-to-peer or through a smart-contract / atomic-swap instead of at an exchange?  Taxable

"If you receive cryptocurrency in a peer-to-peer transaction or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger, or would have been recorded on the ledger if it had been an on-chain transaction.  The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.  If you do not use an explorer value, you must establish that the value you used is an accurate representation of the cryptocurrency’s fair market value."

At least you're able to move your Crypto from one wallet to another without being Taxed! As long as you can prove you own both wallets!

"If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer."

But what about a limit? Surely there must be a loophole were if you only make a small amount of money in Crypto it's not counted right? Like all these 'tips' earned on Publish0x?  Wrong ... the IRS formally declared that payment for 'Microtasks' even less than $1 demands disclosure as income.

"A taxpayer who performs a task through a crowdsourcing platform, including a microtask, has performed a service for the party that requested the task with the expectation that he or she will receive compensation. If the taxpayer receives convertible virtual currency for performing the task, regardless of the value and the manner in which it is received, then the taxpayer has been compensated with property....The convertible virtual currency received must be reported on the taxpayer’s income tax return as ordinary income and may be subject to self-employment tax....These types of microtasks may provide individuals with “rewards” in the form of convertible virtual currency. The value of convertible virtual currency paid in exchange for a single microtask often is a small amount that may be less than $1."

Yikes! All that income coming from Publish0x, faucets, and airdrops... the Feds want their piece. AND the onus to maintain daily records of each 'transaction' and the price-value at a daily/hourly level is entirely on the tax-payer.

The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the  positions taken on tax returns.  You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.

Disclaimer : None of this post constitutes tax advice


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