Cryptocurrency owners beware: the IRS is trying to find excuses for millions of people who don’t comply with the tax rules affecting them, whether inadvertently or on purpose.
The agency asked a pointed question on the first page of Form 1040, just below the taxpayer’s name and address. It first appeared on the 2019 tax return in a less prominent position and moved to its current place on the 2020 return.
In the 2021 statement, the question was slightly reworded: At any time in 2021, did you receive, sell, trade or otherwise dispose of a financial interest in virtual currency?
The declarant must tick the “Yes” or “No” box. Cryptocurrency owners who don’t answer the question or who lie risk higher penalties if the IRS audits them, as it will be difficult to claim ignorance of the rules.
The agency also has other crypto enforcement efforts underway. In 2021, he persuaded judges in Boston and San Francisco to approve subpoenas demanding that two cryptocurrency exchanges turn over records of customers who transacted more than $20,000 in a year from 2016 to 2020.
IRS says cryptocurrencies such as bitcoin are property
The IRS first issued guidelines on taxing cryptocurrencies in 2014. It stated that bitcoin and other cryptocurrencies are property, not currencies such as dollars or euros. These are often real estate investments similar to stocks or real estate.
This means that if the crypto is held in a taxable account, as opposed to a retirement account such as an IRA or Roth IRA, the net profits from a sale are generally taxed as long-term or long-term capital gains. short term, and losses can be used. to make up for the gains.
This tax treatment has advantages, but also significant disadvantages. If cryptocurrency is used to make a purchase, even of a sandwich, the transaction typically generates a taxable sale of the crypto that the buyer must report to the IRS.
For example, let’s say Jack buys a boat with $10,000 of cryptocurrency that he bought for $5,000. Jack’s transfer of crypto is taxable. He has to report a $5,000 taxable gain to the IRS, much like buying the boat with stock that went from $5,000 to $10,000.
This makes cryptocurrencies a cumbersome substitute for cash.
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In 2019, the IRS released more crypto guidelines, including rules for how holders should treat cryptocurrencies if they undergo a reorganization that changes the network protocol for coins or results in the distribution of cryptocurrencies. new tokens. He stated that if a cryptocurrency owner receives something of value, then its fair market value is taxable at the ordinary income rate when the taxpayer has control of it.
In late 2020, the Financial Crimes Enforcement Network (FinCEN), a unit of the Treasury Department separate from the IRS, announced that it could require US taxpayers holding more than $10,000 worth of cryptocurrencies overseas to deposit FinCEN Form 114, known as FBAR, to report these holdings. . This rule has not yet been adopted, so it was not in effect for 2021.
This year’s tax deadline for most individuals is April 18. Want to know more before you file your tax return? Sign up here to read the WSJ 2022 tax guide.
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