Extensions Due -- Fiduciary 9/30/2023 -- Individual & C-Corp 10/16/2023

Cryptocurrency 101

various silver and gold coins in a row

Have you received, sold, sent, exchanged or otherwise traded cryptocurrency? If you answered yes to any of these, then you should be well-versed on the related tax rules. The IRS is ramping up its efforts to bring cryptocurrency users into compliance, and many taxpayers simply aren’t up-to-speed on reporting requirements and/or have failed to pay tax on past transactions. If you are one of them, here is what you need to know:

Now is the time to make sure you are compliant before the IRS contacts you.
Last year, the IRS sent “educational” letters to taxpayers who had failed to report income and pay the resulting tax from cryptocurrency transactions. If you are in this situation and did not receive a letter from the IRS, be proactive about reviewing and amending your previous returns and paying back taxes, interest and penalties. Failure to do so could mean hefty fines and even criminal prosecution.

Become familiar with virtual currency tax rules:

For tax purposes, cryptocurrency is not treated as cash. It’s treated like stocks, bonds and other investment properties, which means you need to report gains and losses on Form 8949 and 1040 Schedule D at tax time.

When you trade cryptocurrency to cryptocurrency (calculating its fair market worth in U.S. dollars) or to a fiat currency like the U.S. dollar, this constitutes a taxable event. It is also a taxable event when you use cryptocurrency to purchase goods and services, which means you may owe sales/use tax.

Buying cryptocurrency with U.S. dollars is not a taxable event because you are not realizing gains. If you trade one type of virtual currency for the same type in a wallet-to-wallet trade, you may not be obligated to pay tax. However, you do have to account for it, depending on the exchange you are using. Make sure to check the tax rules on the specific exchange.

Gift tax rules apply if you give cryptocurrency as a gift that is larger than the annual exclusion amount, which is $15,000 for 2019. The recipient inherits the cost basis and will owe tax and report gains and losses when they sell or trade it.

If you are mining and using virtual currency as a business, the general rule is that you must account for the dollar value of the coin at the time you received it and again when you trade or use it. If you make a payment in cryptocurrency, you must report it as well. If you receive a payment in cryptocurrency for your business, it is a taxable event. Data mining as a business would also result in self-employment taxes. The rules for businesses are complex, so consider seeking the advice of a tax professional.

Recordkeeping is essential
A key item to remember is that you must keep track of your gains and losses from virtual currency each year and deduct this from your cost basis. It’s vital that you keep track of the value for trades you make in U.S. dollars (at the time of the trade).

Need help catching up on virtual currency taxes?
If you think you owe back taxes on cryptocurrency transactions, our firm can help you file an amended return. Alternatively, if you’re planning to utilize cryptocurrency in the future, we can educate you on how to stay in compliance from a tax perspective.

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