Is the IRS going after crypto

IRS's Treatment of Crypto Creates Tax Headaches for Investors

 

Cryptocurrencies have been around since 2009, with Bitcoin being the first of its kind to hit the scene. With their recent rise in popularity, many people have begun to purchase and invest in cryptocurrencies, including bitcoin and Ethereum.

However, while the IRS has recognized cryptocurrencies as property since 2014, they’ve yet to explicitly state how they will treat income and losses derived from cryptocurrency investments.

As it stands now, the IRS has given ambiguous guidance on these transactions, leaving many investors confused as to what they can and cannot deduct from their taxes.

 

How do I file my taxes with cryptocurrency trading gains/losses?

 

The Internal Revenue Service has given taxpayers a heads-up about bitcoin and other digital currency: you’re responsible for reporting them to your tax-preparer and to Uncle Sam.

In Notice 2014-21, issued on March 25, noted that virtual currencies are treated as property, not currency.

That means all sales or exchanges of digital money, including gains or losses from trading them at online exchanges like Coinbase and Bitstamp, must be reported to your local tax authorities in addition to U.S.

federal taxes. It also means cryptocurrency is subject to capital gains tax (at rates similar to those applied to stocks) when investors sell their holdings after holding them long enough (that’s generally a year).

Also read: 10 things cryptocurrency enthusiasts probably won't tell you

 

Taxes and Cryptocurrency - The Problems

 

The Internal Revenue Service (IRS) considers cryptocurrency to be property rather than currency, meaning that all transactions are capital gains or losses.

To add insult to injury, anyone who received crypto in exchange for goods or services must pay tax on it at ordinary income rates.

Furthermore, these capital gains and losses are taxable every year even if there are no transactions; the only cost basis is reset on each coin sold so any paper loss one might have isn’t much use.

This convoluted system has left investors confused about how to file and ultimately led some cryptocurrency owners not to report their holdings.

The IRS estimates that nearly 800 people per year may be making illegal use of cryptocurrencies as a form of money laundering—but more than 14 million people own some kind of cryptocurrency.

 

Cryptocurrency Accountant Services

 

The short answer is yes. In Notice 2014-21, which was issued in March 2014, IRS laid out how virtual currency is treated for tax purposes.

For investors, there are no special accounting requirements; your investments in cryptocurrency count as taxable income and should be recorded on your tax return by filling out Schedule D if you sold it or received any value from it.

However, some cryptocurrencies may be exempt from taxation under certain circumstances (like when a miner receives rewards through mining pools). If you have questions about whether your crypto counts as taxable income, ask an accountant first!

You don't want to end up with any surprises come tax time.

 

Why does the IRS care about your cryptocurrency gains/losses?

If you’re investing in cryptocurrencies, it’s essential to realize that each purchase (i.e., a buy or sell) is considered a taxable event.

In other words, when you buy a digital currency from an exchange, that transaction must be recorded by your tax software and added to your total holdings on your tax return.

Likewise, when you sell crypto assets from an exchange or crypto wallet to cash out fiat currency, that sale is also recorded by your tax software and added to your overall gains/losses for tax season.

Many investors in cryptocurrency fail to account for these gains/losses when filing their taxes.

 

 

What is the fair market value when it comes to cryptocurrencies in a tax filing?

Fair market value is a legal term that means how much your property would sell for on an open market, in an arms-length transaction. If you aren’t trading one cryptocurrency for another, then it’s worth what you paid for it, right?

That all depends on when you made your investment and at what price. Currently, there are about 2.9 to 5.8 million taxpayers who report a capital gain or loss from cryptocurrency transactions: that ranges from $2 billion to $3 billion in tax liability from 2013 through 2015.

 

How can I calculate a fair market value based on historical data points?

 

In an IRS document, two different types of fair market value are discussed: Fair Market Value and Approved Funds Amount.

The Approved Funds Amount (AFA) is used to help determine whether a barter transaction is tax-deductible. For example, you want to purchase land from your neighbor but don't have enough cash on hand. Instead, you agree to trade your car for his piece of land.

In an AFA situation, you would agree upon a price for your car based on its fair market value and then subtract that amount from what you'll be paying him in exchange for his land.

 

Why aren't more people reporting their cryptocurrency gains/losses on their taxes?

 

Cryptocurrency investors are not reporting their gains/losses on their taxes, which could potentially create headaches in future years. If a large number of people don't say or are unsure how to report, these gains/losses they'll end up with an audit--or worse.

Tools to Calculate Estimated Fair Market Value Of Cryptocurrencies For 2017 Taxes (Q4) And 2018 Taxes (Q1, Q2, Q3)

The Internal Revenue Service does not yet have an easy-to-use tool for estimating fair market value (FMV) when filing tax returns in cryptocurrencies, but there are some tools that can help you come up with a ballpark figure.

To use them, though, you must have your cryptocurrency transactions recorded on a public blockchain. If you do not record transactions on a public blockchain then you must report all sales based on whatever dollar amount was in your pocket when sold and adjust your taxes accordingly at tax time.

 

Conclusion

The IRS is still trying to figure out how to treat crypto assets. They want investors to know that they should report their gains and losses on their taxes, but they also need to make sure they collect enough money from these assets.

You will be fined if you do not pay your taxes correctly, so it’s always a good idea to find out what rules are in place before you invest. In order to keep things simple, there are two main ways that people decide whether or not they have an investment or business:

If you hold an asset like Bitcoin as an investment and sell it later for profit , then you don’t have to worry about paying capital gains tax. However, if you bought something with Bitcoin—like a cup of coffee—and sold it later at a profit , then you would have to declare that gain as income.