Treasury Secretary Janet Yellen isn’t big on bitcoin, a point she reiterated recently when she called digital currency speculative and “inefficient.”
This does not mean that Yellen and the department he heads – which includes the Internal Revenue Service – do not care about cryptocurrency.
Now that it’s income tax season, people who own bitcoin and other cryptocurrencies will see that the IRS is actually very curious about a taxpayer’s cryptocurrency transactions.
So much so, they modified the first page of Form 1040 – the main document of taxpayers who file the contribution annually – to ask taxpayers whether they received, sold, sent, exchanged “or otherwise purchased[d] any financial interest in any virtual currency? ”
A “yes” could mean more taxes, but not necessarily, tax experts told MarketWatch.
Cryptocurrencies continue to get a higher profile. Last week, bitcoin reached a market value of over $ 1 trillion. As more people look at cryptocurrency, more people have to deal with the tax rules at stake.
“It can be super, very easy or it can be extremely complicated,” said Matt Metras of MDM Financial Services in Rochester, NY. Some transactions can stimulate multiple tax events simultaneously, but tax professionals have little IRS guidance to work with. said.
Here is a manual on some issues related to tax time when it comes to cryptocurrencies.
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 increases and the owner sells at a profit, he will probably pay capital gains tax.
If the sale for profit takes place within one year, the proceeds are considered a short-term capital gain. It is taxed as ordinary income, which means that it is combined with other things such as wages and taxed in any category the taxpayer falls into.
If the sale takes place at least one year after the purchase, then this is a long-term capital gain. A single applicant earning less than $ 40,400 and a married couple earning less than $ 80,800 receive a 0% rate. Almost everyone else receives a 15% rate, with the rate applying to incomes of up to $ 445,850 for individuals and $ 501,600 for married couples who file jointly.
This is still a lower rate than five of the seven categories of income taxes.
But cryptocurrency is a volatile thing. For example, shortly after the market value of bitcoin reached $ 1 trillion, 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 has bitcoin ATMs in 1,800 locations, allowing people to buy and sell cryptocurrencies.
If the value decreases and the investor sells at a loss, they receive a capital loss deduction. When the annual annual losses exceed the annual annual gains, the taxpayer may also deduct up to $ 3,000 / year. Excess losses in excess of this may be carried forward to future fiscal years.
What happens if I am paid in cryptocurrency?
When you are paid for BTCUSD bitcoin services,
Ether ETHUSD,
or any other cryptocurrency, which is considered ordinary income. It does not matter what the means of payment is when it comes to the question “whether the remuneration constitutes wages for tax purposes,” said the IRS.
Cryptocurrencies that an independent entrepreneur receives for work are considered income from self-employment, the IRS said. In both cases, the value of the cryptocurrency is measured by its value in US dollars at the date of receipt.
So how do I answer this IRS question?
Near the peak of 1040, the IRS wants a “yes” or a “no” to this question: “At any time in 2020, have you received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency?” ”
Remember, a “yes” does not necessarily mean more taxes, experts said. For example, if someone buys and owns crypto, there is no tax event because there is no subsequent sale for profit or loss, Metras said. Someone like him could check “yes” to the answer and should not report the purchase in return, he added.
Laura Walter, the owner of Crypto Tax Girl right near Salt Lake City, Utah, says you have to say “yes” if, for example, you sold cryptocurrency, traded it, spent it on goods and services, received it. as compensation or you received a mouthful or a fork. (A hard fork can happen when a digital coin splits and an airdrop is a way for a company to make a coin with a gift and throw it in registry addresses.)
Analyzing the language on instructions 1040, Walter says you can check “no” if you kept it, transferred it between your own digital wallets, and also if you bought it, but didn’t do anything else.
“You don’t have to report anywhere how much you own or where. All you report is when you have a taxable event, “she said.
However, Metras believes that a person should answer “yes” if he only bought cryptocurrencies.
“Mixed messages came out [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 potential repercussions of unnecessarily checking “yes” are much smaller than not checking “yes” when the IRS has decided that you should have. ”
Where do I get the necessary tax records?
Brokerage firms will automatically generate the necessary tax documents, but this is not necessarily the case for cryptocurrency exchanges.
The task of calculating gains and losses may fall to the cryptocurrency holder, Walter said. “My biggest advice to taxpayers is to keep track of your records.” Tax software can track transactions, she said. Another way is a simple spreadsheet, Weiss said.
People who haven’t kept in touch all year – “pretty much everyone I work with,” Walter said – can come back and collect information about transactions in their wallets and the exchanges they’ve used. But that takes time.
For the first to enter the crypto and order their transactions, buy and sell, Walter has another piece of advice: “Just submit an extension. You can’t do this overnight ”before a meeting with a tax preparer.
Exchanges such as Gemini, Coinbase and Kraken must keep all transaction records for five years, Weiss said. Don’t be afraid to contact them if there are any questions, he said. “It’s better to talk to customer support and be embarrassed that you don’t know your password than to not have these records,” he said.
What are my audit risks?
They could be more and more serious.
IRS officials could soon “move from education to compliance and enforcement,” according to Metras. However, he later added, “we do not know exactly what the execution phase will look like.”
Asking the question about virtual currency at such a prominent game on 1040 is a good indicator IRS officials are “keeping an eye on” the cryptocurrency, Walter added.
Others also believe that the IRS is getting serious. “Regulators are ready to initiate a series of enforcement actions in connection with the tax fraud of the virtual currency,” wrote lawyers from BakerHostetler, a national law firm.
In the summer of 2019, the IRS sent more than 10,000 letters to virtual currency holders who may not have reported all income and tax obligations. “Educational letters” were part of the IRS’s broad focus on cryptocurrencies, said IRS Commissioner Charles Rettig at the time.
The IRS probably did not draw attention to taxpayers with smaller holdings, said MarketWatch tax columnist Bill Bischoff at the time. “The agency is more interested in tracking individuals and companies that engage in significant virtual currency transactions while not complying with tax rules,” he said.
A little fiscal common sense can go a long way. “If you sell $ 50,000 bitcoin and a bank transfer is displayed for that amount, they’ll see,” Weiss said. “Basically, roll the dice if you put $ 50,000 in the bank and don’t report anything.”