The cryptocurrency market sure has been volatile and exciting over the past several months. The dramatic increase in values, plus the ease of trading cryptocurrencies on well-established cryptocurrency exchanges have drawn many new investors to take a chance and dip their toes into the cryptocurrency markets. The IRS has noticed this too and is looking to collect the tax owed to the federal government as the result of all the selling and use of cryptocurrency by taxpayers. So, if you are considering investing in cryptocurrencies, or are a veteran of investing in cryptocurrencies, there are some things you need to know.
It is the IRS’s position that the buying and selling of cryptocurrency should be treated like the buying and selling of stocks traded on public stock exchanges. This means your realized gains and losses are required to be reported on your annual income tax return. The bottom line is if you sell or use cryptocurrency, then you are required to document what you bought, the date you bought it, and the price you paid for it, as well as what you sold, the date you sold it, and how much you sold it for. This tracking is required on a transaction by transaction basis.
Do not assume the cryptocurrency exchanges you use are tracking these detailed transactions for you. Some are not offering this service, and some are willing to give you this service at a price. According to IRS rules, the ultimate responsibility falls to you, the investor/holder, to track all your transactions in detail and accurately report these transactions on your tax return. You do not want to get to the end of the year and be surprised by these rules and not have the information you are required to maintain.
To complicate matters more, if you used cryptocurrency to buy anything, or pay for a service, the expending of that cryptocurrency is required to be reported on your tax return, like any other stock sale, and the gains or losses to be included in the calculation of taxable income. Additionally, if you accept any cryptocurrency for the sale of products or for services you rendered, that income is required to be reported on your tax return as well.
Furthermore, the IRS is now requiring you to answer questions related to cryptocurrency on your annual income tax return. The main question is, “At anytime during (the year), did you receive, sell, exchange, or otherwise acquire a financial interest in any cryptocurrency?” This question is right on the front page on your tax return below your name and address. If you have any crypto transactions and answer no, you can be penalized substantially for a false claim on your tax return.
There is no doubt cryptocurrency is here to stay. If you have questions about how the tax laws apply to you with regard to cryptocurrency, now is the best time to begin the discussion with us.