Failure to include your cryptocurrency on your tax return can cause problems with the IRS
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Do you have bitcoin or other crypto? It could come back to bite you if you don’t let the IRS know.
Regardless of how you interacted with cryptocurrencies over the past year, you are expected to include the information on your 2020 tax return. And for those who have had virtual currency income – whether it be from selling for a profit or paying crypto for work done – you may not be reported.
“It could be a real tax problem for people trying to hide crypto revenue from the IRS,” said Kathryn Hauer, a certified financial planner with Wilson David Investment Advisors in Aiken, South Carolina.
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For example, “Just because one year that a company that paid you doesn’t report that payment. One year that the company is audited and issues late 1099 forms, the IRS expects you to report what you earned have “, said Hauer.
The IRS has put crypto at the center of this tax return season. At the top of the first page of your tax return, a yes or no question will be asked: “Have you received, sold, sent, exchanged, or otherwise acquired financial interests in a virtual currency at any point in 2020?”
In other words, regardless of how it came into your possession, you are expected to tell the IRS about it.
While the price of Bitcoin fell this week, dropping below $ 48,000 on Tuesday after hitting around $ 58,000 on Sunday, its upward trend over the past year likely means capital gains are to be reported. A coin was worth around $ 29,000 at the end of 2020, after starting the year at around $ 7,300.
For example, if you owned Bitcoin but did not make any related transactions in the last year (i.e. you just held it) then of course you did not have a taxable event. Even so, you would answer yes to the tax form question.
In 2019, the IRS sent letters to more than 10,000 taxpayers with crypto transactions who may have reported no income and paid no taxes owed.
The question on page 1 in particular is much more difficult to say that you didn’t know you should report it.
CEO of Taxaroo
“At that point, the IRS said, ‘We’ll let you fix this,’ but it is less likely to happen in the future,” said Knox Wimberly, an IRS-registered agent and CEO of Taxaroo.
“Especially with the question on page 1, it’s a lot harder to say that you didn’t know you should report it,” said Wimberly, who is also a member of the National Tax Practice Institute.
For investing and trading
Assuming you don’t get paid crypto for your work (more on that below), the IRS generally considers Bitcoin and its brothers to be tax property, not currency. This means that regardless of whether you sell a crypto for cash, exchange it for another digital currency, or use it with a merchant who accepts it as payment, the difference between what you originally bought it for – your cost base – and that Value in sale is either a profit or a loss.
“The taxable transaction is not just in US dollars,” said Wimberly. “It can happen anytime you sell or trade it.”
Depending on the crypto exchange you are using and the number of transactions – and the total amount in US dollars – you may receive a Form 1099-K. Even if you do not receive it, there are reporting requirements.
If you have a profit you will be taxed on it. As with other investments such as stocks, any gain you have made is considered short-term gain and will be taxed as ordinary income for having held it for a year or less. Depending on your 2020 tax bracket, this can range from 10% to 37%.
Any crypto held for more than a year that makes a profit on sale will be taxed as long-term profit at a rate of 0%, 15% or 20% depending on your income.
Generally, if there is a loss, you can use it against other income or investment gains of up to $ 3,000 and carry over the remainder to subsequent years.
Crypto as payment
If you have received virtual currency as wages for work done, you are expected to report it as well.
The difference is that in this scenario, the crypto is treated like wages – which are subject to normal income tax as well as self-employment tax for those who are paid as non-employees and receive a 1099-NEC from the company paying the crypto, Hauer said.
If you do not receive a form, this does not release you from your responsibility to report income and pay taxes owed.
If you need to report crypto income because you made profits in 2020 and received them as compensation, the amounts will be entered in separate places on your tax return.
For example, let’s say you sold Bitcoin for a profit of $ 10,000 last year, and you were also paid by a company with Bitcoin worth $ 20,000.
“On your 2020 tax return, you would add $ 10,000 as capital gain to earnings from stocks sold and $ 20,000 as income to other wages or 1099-NEC earnings that were earned,” Hauer said.
Also, any cryptocurrency you mine must be included in your taxable income.