Treasury Department Secretary Janet Yellen is not big on bitcoin, a point she recently reiterated when she called digital currency speculative and “inefficient”.
This does not mean that Yellen and the department she leads – which includes the Internal Revenue Service – don’t care about cryptocurrency.
Now that it is time for income tax returns, people who own bitcoins and other cryptocurrencies will see that the IRS is actually very curious about the taxpayer’s cryptocurrency transactions.
So much so, they adjusted the front page of Form 1040 – the main part of the taxpayer file of income tax paperwork – to ask taxpayers if they received, sold, sent, exchanged “or otherwise acquired[d] any financial interest in any virtual currency? “
A “yes” may mean more taxes, but not necessarily, tax experts told MarketWatch.
Cryptocurrencies continue to gain prominence. Last week, bitcoin reached a market value above $ 1 trillion. As more people look at the cryptocurrency, more people have to face the tax rules at stake.
“It can be super, super easy or extremely complicated,” said Matt Metras, MDM Financial Services in Rochester, NY. Some transactions can generate multiple tax events at the same time, but tax professionals have little guidance from the IRS to work, he said.
Here is an introduction to some tax time issues when it comes to cryptocurrency.
The basics of how the IRS sees cryptocurrency
The IRS treats cryptocurrency as property. It is useful to remember the tax rules that also apply to stocks. If the value goes up and the owner sells at a profit, they are likely to pay capital gains tax.
If the for-profit sale takes place within a year, the income counts as a short-term capital gain. This is taxed as normal income, which means that it is grouped with other things, such as wages and taxed in any range that the taxpayer falls into.
If the sale takes place at least a year after the acquisition, it means a long-term capital gain. A single archiver earning less than $ 40,400 and a couple earning less than $ 80,800 receive a 0% fee. Almost everyone receives a 15% fee, with the fee applying to incomes of up to $ 445,850 for individuals and $ 501,600 for couples filing joint actions.
It is still a rate lower than five of the seven income tax ranges.
But cryptocurrency is something volatile. For example, shortly after bitcoin’s market value reached the $ 1 trillion mark, it approached a bear market.
So it’s important to remember the tax treatment for losses, said Ben Weiss, chief operating officer and co-founder of CoinFlip, which owns bitcoin ATMs in 1,800 locations, allowing people to buy and sell cryptocurrencies.
If the value falls and the investor sells at a loss, they receive a capital loss deduction. When annual annual losses exceed annual earnings, the taxpayer can also deduct up to $ 3,000 / year. Excess losses can also be carried forward to future fiscal years.
What if I get paid in cryptocurrency?
When you get paid for services via BTCUSD bitcoin,
Ether ETHUSD,
or any other cryptocurrency, which counts as normal revenue. It doesn’t matter what the means of payment is when it comes to the question “whether pay constitutes wages for labor tax purposes,” said the IRS.
The cryptocurrency that an independent contractor receives for work counts as income from self-employment, noted the IRS. In both cases, the value of the cryptocurrency is measured by the value in US dollars on the date of receipt.
So, how do I answer this question about the IRS?
Near the top of 1040, the IRS wants a ‘yes’ or ‘no’ to this question: “At some point during 2020, did you receive, sell, send, exchange or acquire any financial interest in any virtual currency? “
Remember that a ‘yes’ does not necessarily mean more taxes, experts say. For example, if someone just buys and maintains encryption, there is no tax event because there is no subsequent sale at a profit or loss, Metras said. Someone like that can mark ‘yes’ for the answer and not have to report the purchase on return, he added.
Laura Walter, owner of Crypto Tax Girl on the outskirts of Salt Lake City, Utah, says you need to say “yes” if, for example, you sold cryptocurrency, traded, spent on goods and services, received compensation or received an air launch or a fork. (A hard fork can happen when a digital currency splits and an air launch is a way for a company to publicize a currency with an offer and launch it by air at accounting addresses.)
Analyzing the language in the 1040 instructions, Walter says you can check “no” if you just hold it, transfer it between your own digital wallets and also if you just bought it and did nothing else.
“You don’t have to report anywhere how much you’re holding or where. Everything you report is when there is a taxable event, ”she said.
Metras, however, thinks that a person should answer ‘yes’ if they simply bought cryptocurrency.
“There are mixed messages coming from [the IRS] about who should check the box, ”said Metras. “I think the IRS and the Treasury are not sure what data they are trying to get out of the question. … I think the possible repercussions of scoring ‘yes’ unnecessarily are much less than not ‘yes’ when the IRS decided you should. “
Where can I get my necessary tax records?
Brokers automatically generate the necessary tax paperwork, but this is not necessarily the case on cryptocurrency exchanges.
The task of calculating gains and losses can fall on the cryptocurrency holder, said Walter. “My biggest advice to taxpayers is to keep track of their records.” Tax software can track transactions, she said. Another way is a simple spreadsheet, said Weiss.
People who didn’t keep an eye on the year – “basically everyone I work with, said Walter – can go back and collect transaction information from their wallets and the exchanges they used. But it takes time.
For newbies who have entered cryptography and are solving their negotiations, purchases and sales, Walter has another piece of advice: “Just register an extension. You can’t do this overnight, ”before a meeting with a tax preparer.
Exchanges like Gemini, Coinbase and Kraken are expected to keep transaction records for five years, Weiss said. Don’t be afraid to contact them if there are any doubts, he said. “It is better to speak to customer support and be ashamed of not knowing your password than not having these records,” he said.
What are my audit risks?
They may be getting more serious.
IRS employees may soon “move from education to compliance and enforcement,” according to Metras. Still, he added later, “we don’t know exactly what the inspection phase will be like.”
Giving the issue of virtual currency such a prominent game in 1040 is a good indicator that IRS officials “are eyeing” cryptocurrency, added Walter.
Others also think that the IRS is getting serious. “Regulators are ready to start a flood of coercive actions related to virtual currency tax fraud,” wrote lawyers at BakerHostetler, a national law firm.
In the summer of 2019, the IRS sent more than 10,000 letters to virtual currency holders who possibly did not report all tax and income obligations. “Educational letters” were part of the IRS ‘growing focus on cryptocurrency, said IRS commissioner Charles Rettig at the time.
The IRS was probably not looking at taxpayers with smaller stakes, said MarketWatch tax columnist Bill Bischoff at the time. “The agency is more interested in tracking individuals and companies that participate in significant transactions in virtual currency while not complying with tax rules,” he said.
A little tax sense can help a lot. “If you sell $ 50,000 in bitcoin and a bank transfer shows that amount, they’ll see it,” said Weiss. “You’re basically playing the dice if you put $ 50,000 in the bank and don’t report anything.”