Whether or not you own cryptocurrency, everyone should be aware of the tax rules surrounding this type of ownership as it becomes more popular. If you have one thing to remember about cryptocurrency, it should be this: remember that Uncle Sam is watching you!
Here’s what you need to know about the IRS and cryptocurrency:
The IRS generally considers cryptocurrency, also known as virtual currency or digital currency, to be property just like stocks and bonds for federal income tax purposes.
Therefore, if you sell cryptocurrency with a gain, it is subject to capital gains tax. Likewise, you can claim a capital loss on the sale or other disposition of cryptocurrency. But that’s not all: every time you exchange cryptocurrency for real currency, goods, or services, the IRS declares it a taxable event.
Suppose you held Bitcoin for more than a year and then sold it with a gain. The gain is taxable up to 20%. High-income taxpayers may also have to pay a 3.8% surtax on cryptocurrency gain. Accordingly, you can use a loss from a sale of cryptocurrency to offset capital gains plus up to $3,000 of ordinary income. Any excess is carried forward to the next tax year.
The IRS is watching you
Cryptocurrency transactions have often flown under the radar, but the IRS is now paying much closer attention. Here’s how the IRS is ramping up its enforcement efforts:
Answer a Form 1040 question. The IRS is so concerned about reported cryptocurrency transactions that it has a cryptocurrency question on page 1 of your tax return, just below your name. Before you complete any part of your tax return, the IRS wants you to answer a question about whether you received, sold, traded, or otherwise disposed of a financial interest in virtual currency.
Brokers must report transactions. After seven years of gently nudging taxpayers to self-report cryptocurrency transactions, Congress has given the green light to the IRS to obtain cost basis information and sales proceeds for all crypto transactions. directly from brokers (such as CoinBase, Electrum or Mycelium) or others. who routinely provide digital asset transfer services on behalf of others. Similar to stock and bond reporting, taxpayers will receive a Form 1099-B from brokers that lists all crypto transactions. These new reporting rules come into effect on January 1, 2023.
Expanded reporting requirement of $10,000. Businesses that accept virtual currency as payment may be required to report transactions over $10,000 to the IRS starting January 1, 2023. In an interesting twist, cryptocurrency and other digital assets would be considered cash for purposes of the $10,000 reporting requirement, while the IRS will continue to treat cryptocurrency as real property (not cash) for tax compliance purposes.
What do you need to do
Here are some suggestions for tracking and reporting your cryptocurrency transactions on your tax return:
Keep up-to-date records. Consider tracking each transaction as it occurs throughout the year. You may also keep your own transaction log to verify the accuracy of your broker’s statements.
Set aside money to pay your taxes. Consider saving a certain percentage of each cryptocurrency transaction you sell with a gain for taxes you may have to pay.
Be aware before diving into cryptocurrency. As you can see, being involved in cryptocurrency may not be for everyone. Sudden swings in valuations are common. Reporting requirements are complicated. As Warren Buffet said, “If you’ve been playing poker for half an hour and you still can’t tell who the sucker is, you’re the sucker.”
Please call if you have any questions about your cryptocurrency transactions.
James Angell is a Certified Public Accountant based in Willits. His office is located at 461 S. Main St. and he can be reached at (707) 459-4205.