+1.77% or any other cryptocurrency, that counts as ordinary income.It doesn’t matter what the medium of payment is 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 work counts as self-employment income, the IRS noted.In both cases, the value of the cryptocurrency is measured by its U.S.dollar value on the date of receipt.So, how do I respond to this IRS question?
Near the top of the 1040 , the IRS wants a ‘yes’ or ‘no’ to this question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Remember, a ‘yes’ doesn’t necessarily mean more taxes, experts said.For example, if someone just buys and holds crypto, there’s no tax event because there’s no ensuing sale for a profit or loss, Metras said.Someone like that could check ‘yes’ to the answer and not have to report the purchase in their return, he added.
Laura Walter, owner of Crypto Tax Girl just outside of Salt Lake City, Utah, says you need to say ‘yes’ if, for example, you sold cryptocurrency, traded it, spent it on goods and services, received it as compensation or received an airdrop or fork.(A hard fork can happen when a digital coin splits and an airdrop is a way to for a company to hype up a coin with a giveaway and airdrop it into ledger addresses .
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Parsing the language on the 1040 instructions, Walter says you can check ‘no’ if you merely held it, transferred it between your own digital wallets and also if you only bought it but did nothing else.
“You don’t have to report anywhere how much you’re holding or where.All you report is when you have a taxable event,” she said.
Metras, however, thinks a person should answer ‘yes’ if they merely bought cryptocurrency.
“There’s mixed messages coming out of [the IRS] on who should be checking the box,” Metras said.“I think the IRS and Treasury aren’t sure what data they are trying to get out of the question.… I think the potential repercussions of checking ‘yes’ unnecessarily are much lower than not checking ‘yes’ when the IRS decided you should have.” Where do I get my necessary tax records?
Brokerage firms will automatically generate the necessary tax paperwork, but that’s not necessarily the case in cryptocurrency exchanges.
The task of tallying up gains and losses can fall on the cryptocurrency holder, Walter said.
“My biggest advice to taxpayers is keep track of your records.” Tax software can track transactions, she said.Another way is a simple spreadsheet, Weiss said.
People who have not been keeping close tabs through the year — “basically everyone I work with, Walter said — can go back and gather up transaction information from their wallets and the exchanges they’ve used.But that takes time.
For the first-timers who got into crypto and are sorting out their trades, buys and sells, Walter has another bit of advice: “Just file an extension.You can’t just do this overnight” ahead of an appointment with a tax preparer.
Exchanges like Gemini , Coinbase and Kraken all have to maintain transaction records for five years, Weiss said.Don’t be afraid to contact them if there are questions, he said.“It’s better to talk to customer support and be embarrassed that you don’t know your password than to not have those records,” he said.
What are my audit risks?
They could be getting more serious.
IRS officials could soon be “shifting from education to compliance and enforcement,” according to Metras.Still, he added later, “we don’t know exactly what the enforcement phase is going to look like.”
Giving the virtual currency question such prominent play on the 1040 is a good indicator IRS officials “are keeping their eye on” cryptocurrency, Walter added.
Others also think the IRS is getting serious.
“Regulators are poised to commence a flurry of enforcement actions related to virtual currency tax fraud,” attorneys at BakerHostetler , a national law firm, wrote.
In summer 2019, the IRS sent out more than 10,000 letters to virtual currency holders who possibly failed to report all income and tax obligations.The “educational letters” were part of the IRS’ expanding focus on cryptocurrency, IRS Commissioner Charles Rettig said at the time.
The IRS likely didn’t have its sights on taxpayers with smaller holdings, MarketWatch tax columnist Bill Bischoff said around that time.“The agency is more interested in tracking down individuals and businesses that engage in significant virtual currency transactions while failing to comply with the tax rules,” he said.
A little tax common sense can go a long way.“If you sell $50,000 of bitcoin and a wire transfer shows for that amount, they are going to see it,” Weiss said.“You’re basically rolling the dice if you put $50,000 in the bank and are not reporting anything.”.
