Need to report Bitcoin transactions on your taxes? Here are 5 things to know first

So much so that they tweaked the first page of Form 1040 – the main taxpayer tax return document every year – to ask taxpayers if they received, sold, sent, traded, or otherwise acquired[d] a financial interest in a virtual currency? “

A “ yes ” could mean more taxes, but not necessarily, tax experts told MarketWatch.

Cryptocurrencies continue to gain visibility. Bitcoin hit a market value of over $ 1 trillion last week. As more and more people look at cryptocurrency, more and more people have to deal with the tax rules involved.

“It can be super, super easy, or incredibly complicated,” said Matt Metras of MDM Financial Services in Rochester, NY. Some transactions can trigger multiple tax events at once, but tax professionals have little IRS advice to work with, he mentioned.

Here’s a look at some cryptocurrency tax time issues.

The basics on how the IRS views cryptocurrency

The IRS treats cryptocurrency like property. It is helpful to remember the tax rules that also apply to stocks. If the value increases and the owner sells at a profit, he will likely pay capital gains tax.

If the for-profit sale takes place within the year, the proceeds count as a short-term capital gain. This is taxed as ordinary income, meaning it is added to other items like wages and taxed at the bracket in which the taxpayer falls.

If the sale takes place at least one year after the acquisition, it is a long-term capital gain. A single tax filer earning less than $ 40,400 and a married couple earning less than $ 80,800 get a rate of 0%. Almost everyone gets a rate of 15%, with the rate applying to income up to $ 445,850 for individuals and $ 501,600 for married couples filing jointly.

That’s still a lower rate in five of the seven income tax brackets.

But cryptocurrency is a volatile substance. For example, shortly after bitcoin’s 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, COO and co-founder of CoinFlip, which has Bitcoin ATMs in 1,800 locations that allow people to buy and sell crypto. -coins.

If the value goes down and the investor sells at a loss, he gets a capital loss deduction. When the annual annual losses exceed the annual annual gains, the taxpayer can also deduct up to $ 3,000 / year. Excess losses beyond that can be carried forward to future tax years.

What if I get paid in cryptocurrency?

When you get paid for services via bitcoin BTCUSD,
+ 3.29%,
Ether ETHUSD,
+ 1.41%
or any other cryptocurrency, which counts as ordinary income. It does not matter the form of payment when it comes to the question of “whether the remuneration constitutes wages for employment tax purposes,” the IRS said.

Cryptocurrency that an independent contractor receives for their work counts as self-employment 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 any time in 2020, have you received, sold, sent, traded or otherwise acquired a financial interest in a virtual currency? ? “

Remember that a “yes” doesn’t necessarily mean more taxes, the experts said. For example, if someone is simply buying and holding crypto, there is no tax event because there is no back-to-back sale for profit or loss, Metras said. Someone like this could tick “yes” to the answer and not have to declare the purchase in their return, he added.

Laura Walter, owner of Crypto Tax Girl just outside of Salt Lake City, Utah, says you have to say ‘yes’ if, for example, you’ve sold a cryptocurrency, traded it, the spent on goods and services, received it as compensation, or received a parachute drop or pitchfork. (A hard fork can happen when a digital coin splits, and an airdrop is a way for a business to hype a coin with a freebie and drop it into ledger addresses.)

Analyze the language on the 1040 instructions, Walter says you can tick “no” if you’ve just owned it, transferred it between your own digital wallets, and also if you only bought it but didn’t do anything else.

“You don’t have to declare anywhere how much you own or where. All you report is when you have a taxable event, ”she says.

Metras, however, thinks a person should answer “ yes ” if they’ve simply bought cryptocurrency.

“There are conflicting messages coming out of [the IRS] on who should check the box, ”Metras said. “I think the IRS and the Treasury are not sure what data they are trying to remove from the question. … I think the potential repercussions of checking “yes” unnecessarily are much smaller than not checking “yes” when the IRS decided you should have.

Where can I get my necessary tax records?

Brokerage firms will automatically generate the necessary tax documents, but this is not necessarily the case in cryptocurrency exchanges.

The task of accounting for gains and losses may fall on the holder of the cryptocurrency, Walter said. “My biggest advice to taxpayers is to keep track of your records.” Tax software can track transactions, she said. Another way is with a simple spreadsheet, Weiss said.

People who haven’t followed closely throughout the year – “basically everyone I work with, Walter said – can go back and retrieve trade information from their wallets and exchanges. that they used. But it takes time.

For newbies who are new to crypto and sort their trades, buy and sell, Walter has another tip: “Just drop an extension. You can’t do this overnight ”before an appointment with a tax preparer.

Exchanges like Gemini, Coinbase and Kraken all have to keep records of transactions for five years, Weiss said. Don’t be afraid to contact them if there are any questions, he says. “Better to talk to customer support and be embarrassed about not knowing your password than not having those records,” he says.

What are my audit risks?

They could get more serious.

IRS officials may soon “move from education to compliance and enforcement,” according to Metras. Still, he later added, “we don’t know exactly what the application phase will look like.”

Giving the virtual currency issue such a big stake on the 1040 is a good indicator that IRS officials are “keeping tabs on” cryptocurrency, Walter added.

Others also think the IRS is getting serious. “Regulators are poised to begin a series of enforcement actions related to virtual currency tax evasion,” wrote lawyers for BakerHostetler, a national law firm.

In the summer of 2019, the IRS sent more than 10,000 letters to virtual currency holders who may have failed to report all income and tax obligations. The “educational letters” were part of the IRS’s growing focus on cryptocurrency, IRS Commissioner Charles Rettig said at the time.

The IRS probably wasn’t targeting taxpayers with smaller holdings, MarketWatch tax columnist Bill Bischoff said at the time. “The agency is more interested in tracking down individuals and businesses that engage in large virtual currency transactions while not complying with tax rules,” he said.

A little tax savvy can go a long way. “If you sell $ 50,000 worth of bitcoin and a wire transfer shows that amount, they’re going to see it,” Weiss said. “Basically, you roll the dice if you put $ 50,000 in the bank and don’t report anything.”