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Treasury Secretary Janet Yellen is not into Bitcoin, a point she recently reiterated when she described the digital currency as speculative and “inefficient.”
That doesn’t mean that Yellen and the department she heads – which includes the Internal Revenue Service – don’t care about cryptocurrency.
Now that it’s season for income tax filing, people holding Bitcoin and other cryptocurrencies will see that the IRS is actually very curious about a taxpayer’s cryptocurrency transactions.
So much so, in fact, that they tweaked the first page of Form 1040 – the main piece of the annual tax return for taxpayers – to ask taxpayers if they received, sold, sent, exchanged, or otherwise acquired it[d] Do you have financial interests in a virtual currency? “
A “yes” could mean more taxes, but not necessarily, tax experts told MarketWatch.
Cryptocurrencies are becoming more and more popular. Bitcoin hit a market value of over $ 1 trillion last week. The more people keep an eye on the cryptocurrency, the more people have to face the applicable tax regulations.
“It can be super, super easy, or insanely complicated,” said Matt Metras of MDM Financial Services in Rochester, NY. Some transactions can trigger multiple tax events at the same time, but tax professionals hardly have said IRS guidelines to handle them.
Here is an introduction to some of the tax timing issues when it comes to cryptocurrency.
The Basics of Viewing Cryptocurrency by the IRS
The IRS treats cryptocurrency as a property. It’s helpful to remember the tax rules that apply to stocks as well. If the value goes up and the owner sells at a profit, he is likely to pay capital gains tax.
If the sale is made at a profit within a year, the proceeds count as short-term capital gain. That is taxed as ordinary income, meaning that it will be confused with other things like wages and taxed in whatever category the taxpayer falls into.
If the sale occurs at least a year after the acquisition, it is a long-term capital gain. A single filer earning less than $ 40,400 and a married couple earning less than $ 80,800 will receive a rate of 0%. Pretty much everyone else gets a 15% rate, with the rate applicable to incomes up to $ 445,850 for individuals and $ 501,600 for married couples filing together.
That’s still a lower rate than five of the seven income tax brackets.
But cryptocurrency is volatile. For example, shortly after the Bitcoin market value hit the $ 1 trillion mark, it approached a bear market.
So it’s important to remember the tax treatment of losses, said Ben Weiss, chief operating officer and co-founder of CoinFlip, which has Bitcoin ATMs in 1,800 locations where people can buy and sell cryptocurrency.
If the value goes down and the investor sells at a loss, he receives a capital loss allowance. Also, if annual annual losses exceed annual annual gains, the taxpayer can deduct up to $ 3,000 per year. Any surpluses beyond this can be carried forward to future tax years.
What if I get paid in cryptocurrency?
When paid for services through Bitcoin BTCUSD, + 3.41%,
Ether ETHUSD, + 1.66% or any other cryptocurrency that is considered normal income. It doesn’t matter what the tender is when it comes to whether the allowance is a wage for employment tax purposes, the IRS said.
The cryptocurrency that an independent contractor receives for work is considered self-employed income, according to the IRS. In both cases, the value of the cryptocurrency is measured using the US dollar value on the day of receipt.
How do I answer this IRS question?
Near the top of the 1040, the IRS would like a yes or no to this question: “Have you received, sold, sent, exchanged, or otherwise acquired financial interests in any virtual currency at any point during 2020?” ”
Remember, a “yes” doesn’t necessarily mean more taxes, experts said. For example, if someone just buys and holds crypto, there is no tax event because there is no subsequent sale with a profit or loss, Metras said. Someone like this could answer “yes” to the answer and not have to report the purchase when it is returned, he added.
Laura Walter, owner of Crypto Tax Girl outside of Salt Lake City, Utah, says you have to say “yes” to things like selling, trading, spending on goods and services, receiving compensation, or receiving a drop of air or a fork in cryptocurrency . (A hard fork can happen when a digital coin crumbles and a drop of air is a way for a company to overdo a coin with a giveaway and toss it in ledger addresses.)
Walter analyzes the language using the 1040 instructions and says you can check no if you just kept it, transferred it between your own digital wallets, and also if you just bought it but did nothing else.
“You don’t have to say anywhere how much you’re holding or where. All you report is when you have a chargeable event, ”she said.
However, Metras believes that a person should answer “yes” if they have only bought cryptocurrency.
“Mixed messages are coming out [the IRS] about who should check the box, ”Metras said. “I think the IRS and Treasury are not sure what data they are trying to put out of question. … I think the potential impact of checking “yes” unnecessarily is much less than not checking “yes” when the IRS decided you should. “
Where can I get my necessary tax documents from?
Brokerage firms automatically generate the required tax documents, but this is not necessarily the case when exchanging cryptocurrencies.
The task of adding up profits and losses can be incumbent on the holder of the cryptocurrency, said Walter. “My biggest advice to taxpayers is to keep an eye on your records.” Tax software can track transactions, she said. Another way is a simple table, said Weiss.
People who haven’t kept track of things all year round – “basically everyone I work with, said Walter – can go back and get transaction information from their wallets and the exchanges they use. But that takes time.
For the first-time visitors who are into crypto and sort out their deals, purchases and sales, Walter has one more piece of advice: “Just submit an extension. You can’t just do that overnight ”before an appointment with a tax advisor.
Exchanges like Gemini, Coinbase and Kraken are required to keep transaction records every five years, Weiss said. Don’t be afraid to contact her if you have any questions, he said. “Better to speak to customer support and be ashamed of not knowing your password than not to have these records,” he said.
What are my exam risks?
You could get more serious.
According to Metras, IRS officials could soon “move from training to compliance and enforcement.” Still, he later added: “We don’t know exactly what the enforcement phase will look like.”
Walter added that having the virtual currency question so prominently played on the 1040 is a good indicator that IRS officials are “keeping an eye on” cryptocurrency.
Others also think the IRS is getting serious. “The supervisory authorities are ready to initiate a series of enforcement measures related to tax fraud in virtual currencies,” write lawyers from the national law firm BakerHostler.
In the summer of 2019, the IRS sent more than 10,000 letters to virtual currency holders who may not have reported all of their income and tax obligations. The “educational letters” were part of the IRS ‘growing focus on cryptocurrency, said IRS Commissioner Charles Rettig at the time.
The IRS likely wasn’t targeting taxpayers with smaller holdings, MarketWatch tax columnist Bill Bischoff said at the time. “The agency is more interested in tracking down people and companies who are making significant transactions in virtual currencies and in breach of tax regulations,” he said.
A little common sense can go a long way. “If you sell $ 50,000 worth of bitcoin and show a transfer for that amount, you will see it,” Weiss said. “You basically roll the dice if you put $ 50,000 in the bank and don’t report anything.”