Treasury Department Secretary Janet Yellen has no importance in Bitcoin, a point she reiterated recently when she described the digital currency as speculative and “inefficient.”
This does not mean that Yellen or the department he heads, which includes the Internal Revenue Service, do not care about the cryptocurrency.
Now that it’s income tax filing season, people who own bitcoins and other cryptocurrencies will see that the IRS is very curious about a taxpayer’s cryptocurrency transactions.
So much so, they have modified the first page of Form 1040, the main piece of income tax documentation submitted by taxpayers annually, to ask taxpayers if they have received, sold, sent, exchanged “or acquired[d] any financial interest in any virtual currency? “
A “yes” could mean more taxes, but not necessarily, tax experts told MarketWatch.
Cryptocurrencies continue to have a higher profile. Last week, Bitcoin reached a market value of more than $ 1 trillion. As more people observe cryptocurrency, more people have to face the tax rules at stake.
“It can be super, very easy or it can be incredibly complicated,” said Matt Metras of MDM Financial Services in Rochester, New York. dit.
Here is an introduction to some tax time related issues when it comes to cryptocurrencies.
Basics about how the IRS sees cryptocurrency
The IRS treats cryptocurrency as property. It is helpful to remember the tax rules that also apply to actions. If the value goes up and the owner sells with profits, he will probably pay capital gains tax.
If the for-profit sale occurs within one year, revenue is recognized as a short-term capital gain. This is taxed as ordinary income, which means it is combined with other things, such as wages, and is taxed on any stretch that includes the taxpayer.
If the sale occurs at least one year after the acquisition, it is a long-term capital gain. An applicant earning less than $ 40,400 and a married couple earning less than $ 80,800 get a 0% fee. Almost everyone has a 15% rate, with the applicable income rate of up to $ 445,850 for individuals and $ 501,600 for married couples filing together.
This is still a rate below five of the seven tranches of income taxes.
But cryptocurrency is volatile. For example, shortly after the market value of bitcoins reached $ 1 trillion, it approached the bear market.
Therefore, it’s important to remember tax treatment for losses, said Ben Weiss, chief operating officer and co-founder of CoinFlip, which has bitcoin ATMs at 1,800 locations that allow you to buy and sell cryptocurrencies.
If the value goes down and the investor sells at a loss, he will get a capital loss deduction. When annual losses exceed annual earnings, the taxpayer may also deduct up to $ 3,000 / year. Losses in excess can be reported in future fiscal years.
What if I get paid in cryptocurrency?
When you are paid for services through bitcoin BTCUSD,
Ether ETHUSD,
or any other cryptocurrency, which is counted as ordinary income. It doesn’t matter what the means of payment is when it comes to “whether compensation constitutes a wage for labor tax purposes,” the IRS said.
The cryptocurrency that an independent contractor receives for employment counts as self-employed income, the IRS noted. In both cases, the value of the cryptocurrency is measured by its value in US dollars on the date of receipt.
So how do I answer this IRS question?
Near the top of 1040, the IRS wants a “yes” or a “no” to this question: “At some point in 2020, you received, sold, sent, exchanged, or acquired some other type of financial interest in any virtual currency? ”
Remember, a “yes” doesn’t necessarily mean more taxes, experts said. For example, if someone just buys and maintains cryptography, there is no tax event because there is no sale to make a profit or loss, Metras said. Someone like this could check that yes to the answer and not have to communicate the purchase on your return, he added.
Laura Walter, owner of Crypto Tax Girl on the outskirts of Salt Lake City, Utah, says you have to say “yes” if, for example, you sold cryptocurrency, exchanged it, spent it on goods and services, received it as to compensation or you received it an airdrop or a fork. (A hard fork can occur when a digital currency splits and an air release is a way to allow a company to advertise a coin with a gift and toss it in ledger addresses).
Analyzing the language in the instructions of the 1040, Walter says you can mark “no” if you just kept it, transferred it between your own digital wallets, and also if you just bought it but didn’t do anything else.
“You don’t have to report how much you have or where. All you report is when you have a taxable event, ”he said.
Metras, however, believes a person should answer “yes” if they only bought cryptocurrency.
“There are mixed messages [the IRS] on who should check the box, “Metras said.” I think the IRS and the Treasury aren’t sure what data they’re trying to get out of the matter. … I think the potential repercussions of unnecessarily marking the “yes” are far less than not marking the “yes” when the IRS decided you should have it. “
Where can I get my required tax records?
Brokerage firms will automatically generate the necessary tax procedures, but this is not necessarily the case for cryptocurrency exchanges.
The task of counting gains and losses may fall to the cryptocurrency holder, Walter said. “My main advice to taxpayers is to keep track of your records.” Tax software can track transactions, he said. Another way is a simple spreadsheet, Weiss said.
People who haven’t been vigilant all year – “basically everyone I work with, Walter said – can go back and gather transaction information from their portfolios and the exchanges they’ve used. But that takes time.
For people who are new to cryptography and are ordering their business, buying and selling, Walter has another piece of advice: “Just submit an extension. You can’t just do it overnight.” of an appointment with a tax preparer.
Exchanges like Gemini, Coinbase and Kraken have to keep 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 service and be ashamed that you don’t know your password than not to have those records,” he said.
What are my audit risks?
They could be getting more and more serious.
IRS officials could soon “move from education to compliance and enforcement,” according to Metras. However, he added later, “we don’t know exactly what the application phase will be like.”
Giving the issue of virtual currency such a prominent game in 1040 is a good indicator that IRS officials are “watching” the cryptocurrency, Walter added.
Others also think the IRS is getting serious. “Regulators are ready to initiate a series of enforcement actions related to tax fraud in the virtual currency,” the lawyers of the national law firm BakerHostetler wrote.
In the summer of 2019, the IRS sent more than 10,000 letters to virtual currency holders who possibly failed to report all tax and income obligations. “Educational letters” were part of the IRS’s growing focus on cryptocurrency, said IRS Commissioner Charles Rettig at the time.
It is likely that the IRS did not have its focus on taxpayers with smaller holdings, MarketWatch tax columnist Bill Bischoff said at the time. “The agency is more interested in tracking people and businesses that make significant virtual currency transactions while not complying with tax rules,” he said.
A little tax common sense can go a long way. “If you sell $ 50,000 bitcoins and a bank transfer is shown for that amount, they’ll see,” Weiss said. “You’ll basically roll the dice if you put $ 50,000 in the bank and don’t report anything.”