As more individuals invest in cryptocurrencies (digital asset market exceeded $2 trillion in 2021), it is important to remember that trading and paying for goods in these currencies is a taxable event that must be reported to the IRS. Let’s look at some prior posts about taxpayer obligations.
Prior Posts – Cryptocurrency Tax Considerations
As we reported in our December 19, 2017, September 24, 2019 and October 15, 2019 posts, the IRS is using data analytics to identify taxpayers who are not reporting their transactions and John Doe summons to force the platforms offering this currency to reveal who their customers are. We also discussed that if cryptocurrency investments are held outside the U.S., that a Foreign Bank Account Report (FBAR) filing requirement (FinCen Form 114) may have to be made. For those taxpayers who don’t hold virtual currency for investment purposes but to pay for goods, that also requires such transactions to be reported. We suggest that you read these previously published posts using the links provided.
BRIEF Tax Overview
Cryptocurrency is considered property for tax reporting purposes, similar to stocks and bonds in some aspects. Accordingly, it may be subject to capital gains when exchanged or sold at a profit. If you exchange digital coins, cash out to U.S. dollars or make a purchase, you may have a taxable event.
The gain or loss is the difference between your purchase price (cost), known as the basis, and value upon sale or exchange. The applicable rate of taxation depends on how long you have owned the coin. You may qualify for long-term capital gains rates (usually 15% or 20%), depending on taxable income, if you hold the currency for more than one year. However, selling or exchanging assets after less than one year triggers short-term capital gains, with regular income tax rates, up to 37% for top earners.
CNBC reported that one in ten persons invest in virtual currency. It was reported that roughly one-third trade weekly or monthly, and nearly a quarter trading daily. That’s a lot of transactions to be tracking.
The challenge for taxpayers is that they need to track these transactions and it’s difficult for exchanges to track the movement of assets and your cost basis. For example, if you purchase bitcoin on one trading platform and moved it to another platform, the second exchange would not know your original basis.
What happens if the platform you use doesn’t provide you with a Form 1099-B to report your gain or loss to the IRS? As with most tax documentation issues, the responsibility to maintain accurate and complete records is that of the taxpayer. Request the platform’s spreadsheet of transactions that it should be able to provide you. Keeping these spreadsheets in an orderly manner is another challenge if you switch investment platforms or brokers.
Realize that trading you using virtual currency has income tax reporting requirements. It is your responsibility to track and diligently document each of your transactions. Helpful Hint: Do not wait until you have a taxable event to compute your basis, but rather track your basis with each transaction you make. At the end of each tax year, review your tax basis computation to make sure it is current and that you have backed it up to another source.
Brokers, if they report virtual currency transactions to the IRS as required, may only report the gross sales and not the cost basis of those transactions. If you are unable to document your tax basis, the IRS position is that you have a zero tax basis – meaning that the proceeds you receive is your taxable income for that transaction.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.