Published
4 years ago on
April 24, 2020
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Spring is in the air which means a few things, including allergies, warmer weather, and tax season. As if taxes weren’t grueling, confusing, and time-consuming enough, new regulations that the IRS have put in place have added more things to report, specifically as it pertains to cryptocurrency. While the first instruction regarding crypto happened in 2014, 2020 is the first year that crypto users and traders will be aggressively audited.
Today we’ll be breaking down everything you might need to know about cryptocurrency tax reporting, from the why to the how.
Introduction to Crypto & Taxes
The new reporting question reads, “at any time during 2019, did you sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Now, even still you might be thinking, “what does the Bitcoin I had this year have to do with this?” You may not be realizing that cryptocurrency is something that needs to be reported. You would’ve been right, a few years ago before the digital currency erupted.
Due to some vague vernacular about what counted and what didn’t for cryptocurrency, many were under the impression that in-game currency in the top video games counted and had to be reported, and who keeps track of that? However, more recently, edits were made to clarify the grey area of what counts and what doesn’t. This CNN article discusses the change, but the main thing to note is as follows:
“The IRS recognizes that the language on our page potentially caused concern for some taxpayers. We have changed the language in order to lessen any confusion. Transacting in virtual currencies as part of a game that does not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return,” said IRS Chief Counsel Michael Desmond.
Defining Cryptocurrency
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The only definition to adhere to would be that from the IRS, which reads: “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.” This, with the added disclosure found above, gives a holistic view of how cryptocurrency is regarded from a legal standpoint.
Why does cryptocurrency get taxed?
Because it’s regarded as an asset similar to any traditional measure of investing, such as stocks, property, or in goods such as gold or art. It’s just like any of those means of investment because the value can fluctuate, but if regarded well, you can make a return.
How Crypto Gets Taxed
If the question listed above is answered ‘yes’, the IRS will then go to find the corresponding Form 8949 capital gain/loss report for virtual currency. If they don’t find it, they have means to pursue a case on the grounds of intentional disregard, as it appears as though you knowingly failed to report your cryptocurrency activities.
However, it’s not a bad thing that you have to report, because of this code explained by Cornell Law School. Because cryptocurrency is regarded similarly to stocks, there is relief offered for losses on your capital assets, namely, crypto. This relief comes in the form of a deduction, or potentially an increased tax refund. The bottom line: do your tax reporting honestly and thoroughly,
For more information on the how & why with cryptocurrency taxes, or to read about what isn’t taxable, check out this 2020 Cryptocurrency Tax Guide.
Things To Keep In Mind
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Forbes recently shared some tax tips & tricks as it pertains to cryptocurrency, which you can find here. One thing that they listed as something to keep in mind was that “Sales are not the only form of taxable transaction”. We touched on this earlier, but other transaction types include if the crypto was sold for cash, traded for different crypto, or used to buy anything. Transferring currency, say, from an exchange to an e-wallet or vice versa, however, is not something to report.
Another thing to keep in mind is all the different ways that crypto activity can become ordinary income, such as cost split-ups (aka forks), airdrops, mining, and staking, to an extent. Ordinary income is the bracket that includes wages, salaries, tips, and commissions yet exclude capital gains/losses and dividends. This is important since ordinary income is regarded differently than the aforementioned capital gains/losses, investments, and dividends.
There are a number of other details to keep in mind, like how crypto gifts or charitable contributions are considered, different rules crypto activity is subject to, and different types of reporting, but this guide provides a general ‘need to know’ as it pertains to cryptocurrency and taxes. Intermixed throughout the article are embedded links that can provide additional context and information to help you get through the bizarre 2019 tax season.
Investment Disclaimer
