Cryptocurrency Taxation: Here’s What You Need To Know

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Virtual currencies are taxed as a property, or as an investment, when you sell them. To make things more confusing, using them to buy something technically counts as a sale. If you are paid in bitcoin or other crypto, on the other hand, this will be treated as taxable income for you.

This is because almost all transactions can be taxable and must be reported.

While bitcoin and other cryptocurrencies can be virtual, they have very real tax consequences. If you do not pay the tax you owe, you will be liable to interest and penalties and, in some circumstances, even to criminal prosecution. So if you couldn’t resist getting into, say, bitcoin’s mad rush, it has grown 437% in the past year alone, at one point north of $ 60,000 in April and below $ 43,000 this week, keep good records, as you are responsible for maintaining documentation for each of your transactions.

Are crypto transactions reported to the IRS?

There is no legally required third party reporting of crypto transactions or many types of crypto payments. But that may soon change if the Law on Investment in Infrastructure and Jobs is enacted. If passed, exchanges like Coinbase should report your transactions. The bill has passed the Senate and awaits a vote in the House this month.

In the meantime, and especially if the bill is not enacted, the IRS will assess in various ways whether you have made taxable crypto transactions.

For example, any business paying more than $ 600 to a non-employee or paying a salary to an employee must report that income to the IRS, said Mark Luscombe, senior federal tax analyst for Wolters Kluwer Tax & Accounting.Plus, each Federal filer at the top of their Form 1040 must truthfully answer a question as to whether they received, sold, sent, traded, or otherwise acquired a financial interest in a virtual currency during the tax year.

This does not mean that the IRS will simply rely on an honor system. “They feel like there are a lot more people engaged in virtual currency transactions than what is reported on returns,” Luscombe said.

So, in conjunction with the US Department of Justice, the tax agency is actively seeking compliance in a number of ways.

It has launched a “virtual currency compliance campaign” which will include public awareness but also “reviews”. It can mean audits. In addition, the IRS sent letters in the summer of 2019 to 10,000 people alerting them to their tax obligations regarding virtual currencies and urging them to review and amend previous returns if they owe taxes, interest and charges. overdue penalties.

How did he get the names of those 10,000 people? “[T]through various ongoing IRS compliance efforts, ”the agency noted.

One such effort: The IRS seeks client lists from cryptocurrency companies through legal summons.

“The Department of Justice will continue to work with the IRS to ensure that cryptocurrency owners pay their fair share of taxes,” the DOJ said in a statement in April. illegal activity in virtual currency transactions.

What tax do I owe on cryptocurrency if I sell it?

You must report any capital gain or loss resulting from the sale of your cryptocurrencies. This will be determined by the difference – in US dollars – between the amount you paid when buying and the amount you received when you sold them.

If you have held the investment for a year or less and its value has appreciated when you sold it, your gain will be taxed as ordinary income. If you held it for more than a year, then it would be subject to capital gains tax rates.

If you lost money on the sale, you can use your capital loss to offset any capital gains you made in other investments, Luscombe said.

What if I was paid in virtual currency for a good or service?

It is to be reported as ordinary income for you. And the declared income amount must be the US dollar value of the virtual currency on the day you received it.

What if I paid someone else in virtual currency?

It is like a bitcoin sale where you will realize a gain or a loss. The IRS notes that the gain or loss is determined by “the difference between the fair market value of the services you received and your adjusted basis in the virtual currency traded.”

What should I report if I have only purchased virtual currency?

According to the IRS, you are not required to report this on your tax return, just as you would not report an investment that you bought and hold in a brokerage account, unless it deprives you. taxable income, such as dividends or interest.

Will my state tax my crypto transactions?

Probably, but you should see what your state revenue department has said on the matter.

“Most states haven’t specifically addressed virtual currency, which means the majority of states that have an income tax would follow the federal lead,” Luscombe said.

Any money you earn from your crypto investments or income payments will count towards your Federal Adjusted Gross Income. And most states use your federal AGI as a starting point.

Two states – Nevada and Wyoming, neither of which have income tax – have clarified that they will not subject virtual currency transactions to state property tax, Luscombe said.

(For more information on these and other questions, the IRS has created this FAQ. And if your situation is particularly complex, consult a tax professional with experience in this area.)

Editor’s Note: This story is an update of the original version, which was released in April 2021.

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