During tax season, accountants and tax preparers receive many questions from individuals about how to handle certain issues regarding income, expenses, and tax deductions. One of the new questions and a pressing question for many taxpayers is how cryptocurrency should be reported on income tax returns.
What is Cryptocurrency?
According to an article published by NerdWallet, cryptocurrency is an online form of payment that can be used to pay for services and goods. In some cases, “coins” are issued by individual companies that can only be used to purchase goods or services from that company. In January 2018, about 1,400 cryptocurrencies were being traded online. Companies make money through initial offerings. Billions of dollars can be raised through an initial offering. Older cryptocurrencies are worth billions. The total value of bitcoins is worth an estimated $283 billion, and ripple is worth about $119 billion. The value of all cryptocurrencies is estimated to be about $708 billion.
Even though cryptocurrency has soared in popularity and value, sources disagree about whether cryptocurrency is a wise or safe investment. Supporters argue online currency is a safe, allows anonymity, removes central banks from the money supply, and the currency is increasing in value. However, critics point out that the “value” of the currency is only based on another person paying more than you did for the currency.
Does the IRS Require You to Report Cryptocurrency Transactions on Tax Returns?
The Internal Revenue Service (IRS) released information in 2014 with tax information related to virtual currencies. At that time, the IRS did not consider virtual currencies as actual currency under its definition of currency. However, the IRS appears to be more interested in cryptocurrency. In 2016, a court said the IRS could summon information from Coinbase on its more than 14,000 users.
However, since 2014, the IRS has not issued any additional direction on how to report virtual currency transactions on tax returns, despite requests from The American Institute of CPAs and the Treasury Department. Therefore, many taxpayers remain confused about how to report virtual currency transactions on tax returns.
Some of the suggestions for dealing with cryptocurrency and the IRS offered in the NerdWallet article include:
- Maintain Detailed Records — According to the IRS, virtual currency is considered property. Because cryptocurrency is considered property, any losses or profits should be reported and taxed according to your capital gains rate. However, you may not receive a 1099 form; therefore, you must assume the responsibility for keeping detailed records of each transaction. Because reconstructing records can be extremely frustrating and time-consuming, you should print a detailed transaction report for your cryptocurrency exchanges. In addition, it is wise to make notes as a backup (e. date, amount, parties, etc.).
- Calculating Gains and Losses for Tax Purposes — Since the IRS views cryptocurrency as property, you need to calculate your losses and gains to determine the capital gains tax. Remember, property held for less than a year is a short-term gain and property held more than a year is a long-term gain. Your accountant or tax preparer can help you calculate gains and losses, or you may want to purchase software that calculates these amounts for you. If using software or an online service, just make sure that it is a reputable company that utilizes the most current tax laws as a basis for the calculations.
- Obtain Expert Advice — Tax laws, including laws regarding cryptocurrency, are often confusing and complex. Furthermore, the rules and laws can change from tax year to tax year. Hiring a CPA, retirement planner, or tax preparer with knowledge of cryptocurrency may be your best step to ensure your tax returns are prepared in accordance with the current tax laws and rules governing cryptocurrency transactions.
- Check for IRS Updates — As with other tax issues that have resulted from the constant changes in how we conduct business, the rules and laws regarding cryptocurrencies and taxes may change. It is a good idea to check for updates, especially before preparing your tax returns each year, to ensure you are following the IRS guidelines for virtual currencies.
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“'Wild west' days are over for cryptocurrencies, as IRS steps up enforcement.” Annie Nova. CNBC.com. 17 January 2018.
“Cryptocurrency for Beginners: 7 Questions to Ask.” James Royal, Ph.D. Nerdwallet.com. 11 January 2018.