The Time for Not Reporting Your Cryptocurrency Transactions is Over. The IRS Wants to Know it all
President Biden’s Build Back Better plan is good news for the country’s progress. But with it comes along the need to raise more funds from the people and businesses to the Treasury Department. The government must raise the trillions of dollars needed to finance it. And to do it, they must tighten the screw on taxation. For this reason, even cryptocurrency traders and investors are finding themselves in the firing line. This is why I am always saying that no one is safe right now when it comes to taxes. The IRS is coming for everyone who has been potentially underpaying taxes.
However, this article focuses on how the IRS is already tightening the screw on cryptocurrency traders and investors.
What is cryptocurrency?
According to Investopedia, Cryptocurrency is “a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.” Examples of cryptocurrency are Bitcoin, Dogecoin, Ethereum, Litecoin, and Bitcoin Cash.
The above definition makes it interesting as it mentions the phrase “digital asset.” I said this is interesting because an asset is also someone’s property. And according to the IRS, “Virtual currency (or cryptocurrency) is treated as property, and general tax principles applicable to property transactions apply to transactions using virtual currency.” However, the IRS also includes all forms of digital currencies as taxable property, hence their use of ‘virtual currency’ on the above quote instead of using cryptocurrency.
You need to understand how the IRS uses words to communicate about taxing virtual currencies. This year’s most significant difference is in their use of “virtual currency transactions” other than just ownership. As such, the IRS is targeting virtual currency transactions this year and the years to come. This is because transactions in crypto are the ones that result in the need to pay taxes because there is money that exchanges hands.
For your benefit and for tax purposes, transactions in crypto include activities such as getting paid in crypto, selling crypto and getting rewards for crypto mining or free coins. Therefore, if you were involved in any of the above in 2021, you must declare it and the monies involved on your tax return during the ongoing 2022 tax season. The IRS has put a question on the first page of your Tax Return for you to indicate if you were involved in any virtual currency transactions in 2021.
How will the IRS know that you had activity in cryptocurrency?
A new $1.2 trillion Biden bipartisan infrastructure law requires annual tax reporting by digital currency brokers starting in 2023. That’s when they will know about your activities.
More so, merchants like PayPal, which many people use to fund crypto wallets and receive proceeds from selling crypto, will report transactions to the IRS when a user reaches the $600 minimum. So, if you received money from a virtual currency platform in 2021 via PayPal, the IRS would see this and expect to see the same on your tax return. That’s why I am emphasizing that no one is safe. Your safest option is to play by the rules.
What must you do to be safe if you are involved in cryptocurrency?
The IRS is targeting all crypto transactions that many taxpayers used to hide. They have changed the wording on the crypto question on Form 1040 (U.S. Individual Income Tax Return) to put taxpayers in a corner. The question is explicitly asking about ‘transactions’ in crypto – it is no longer vague, but direct. Choose (YES) if you transacted in virtual currency in 2021 and (NO) if you did not.
If you are my client or plan to be one for this tax season, your best way to be safe is to listen to me, your tax professional. I will guide you properly so that the IRS won’t come back to haunt you. Do not be tempted to hide any information from me.
More so, report accurate transaction amounts on your tax return. If you received virtual currency worth $2 million in 2021, indicate that exact amount when preparing your tax return. Finally, you must keep all paperwork that supports these transactions.
In conclusion, these are part of new changes that are confusing taxpayers in 2022. If you are part of taxpayers struggling with 2021 federal returns because of this and many other tax headaches, talk to me today by calling (202) 618-1297. I will assist you.
People have also asked the following
- How do I get started with cryptocurrency?
You will need a “wallet” to keep your crypto, so to start this journey, you can open an account on a crypto exchange online. They helpful instructions on how to proceed, one of which is how to ‘load’ money on your account in order to buy the virtual currencies. You can load money using your bank or merchants such as PayPal.
- Is it safe to buy cryptocurrency?
Crypto is safe because of the blockchain technology that it uses. It is not traceable or controllable by governments. However, activities such as funding your account on cryptocurrency exchanges or withdrawing money from there could be monitored since this is done through a bank or PayPal, etc. That is why the IRS is confident that they will catch cryptocurrency transactions hidden for tax purposes.
- What is a cryptocurrency, and how do I invest in it?
A cryptocurrency is a form of a digital asset based on a decentralized huge network. To invest in it, you need to open an account with a cryptocurrency exchange and have a crypto wallet, be it digital or physical.
- How much does it cost to start buying cryptocurrency?
Even though cryptocurrency such as Bitcoin may be pricey, you can still buy a small portion of it, for example, 0.00000001 of Bitcoin. This should cost less. Therefore, there is no minimum amount required – it all depends on the exchange you chose to open your account – some have minimum deposit thresholds. Besides Bitcoin, some cryptocurrencies are already cheap. You can buy them for some cents.
