TOP TIPS - Understand Your Cryptocurrency Reporting Obligations
As the tax reporting season enters full swing, filers need to keep abreast of IRS rule changes and new obligations.
New IRS rules in relation to the reporting of cryptocurrency assets make it imperative for taxpayers to be clear and transparent in their disclosure of cryptocurrencies, with those who fail in this regard facing potential criminal investigation, fines as high as $250,000 and as many as five years in prison.
Here we take a look at the key factors in cryptocurrency reporting.
Understand your reporting obligation
The most pertinent question is on page one of Schedule 1 of the individual income tax return. It asks: "At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?"
At this point it is important to understand that you will need to report all gains or losses in, or income from, cryptocurrency, regardless of whether you received Form W-2 (Wage and Tax Statement) or any1099 income information form.
Relevant forms include:
- Form 8949, Sales and Other Dispositions of Capital Assets.
- Form 1040, Schedule D, Capital Gains and Losses, for summarizing capital gains and deductible capital losses.
- Form 1040, U.S. Individual Tax Return for reporting ordinary income from crypto.
- Other relevant Forms include Form 1040-SS, Form 1040-NR and Form 1040.
Don't pretend that you didn't know
In 2019 the IRS sent letters to 10,000 crypto taxpayers in relation to the 2019 draft Form 1040. If you received one of these letters, it will be more difficult to claim an innocent mistake or that you simply did not understand the scope of your obligations.
Be clear about cross-border crypto assets
FBAR already places clear obligations on those who carry out cross border cryptocurrency transactions and there are signs that the Department of Justice Tax Division is committed to making prosecutions.
Furthermore, the IRS's Criminal Investigation Division has indicated its willingness to collaborate with tax authorities from foreign countries to share data and enforcement plans in order to combat tax evasion involving cryptocurrency tax.
Know what is taxed
According to IRS Notice 2014-21 cryptocurrency is classified as property for tax purposes. This means that you are liable for tax if you make a gain and, conversely, have the potential to claim tax back if you suffer a loss. Furthermore, any cryptocurrency holder will need to know:
- The date on which they bought the cryptocurrency.
- How much they paid for the cryptocurrency and how much they received for it at time of sale.
- The value of any cryptocurrency held. This can be problematic, particularly if it was obtained via peer-to-peer transactions, or has no published value.
Filers are advised to be reasonable when reporting the fair market value and be consistent with any method, such as FIFO (first-in-first-out) to reduce the possibility of incurring a penalty.
Overall, the taxpayer should demonstrate a best efforts to comply.
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