By: Kyle Meissner, Manager and CPA
Cordell, Neher & Company, PLLC
From AmbaCoin to Zcash there are now over 10,000 different types of virtual currency currently in use. Approximately 14 percent of Americans own at least one share of one of these virtual currencies. Which is why it is important to understand the tax implications associated with receiving, buying, and selling these currencies. This is taking on additional relevance because the IRS is starting to crack down on non-reporting of capital gains and losses associated with them.
Keep reading to learn more about the tax implications associated with cryptocurrency and what the IRS is doing to increase tax compliance on crypto transactions.
What you need to know about virtual currency tax reporting:
Virtual currency is treated as property for federal income tax purposes which means that general tax principals applicable to property transactions also apply to transactions using virtual currency.
Similar to when you hold traditional investments, cryptocurrency owners must recognize gains and losses when filing their taxes. These gains are typically treated as capital in nature, and losses may be used to offset those gains.
Additionally, anytime you convert from one virtual currency to another you will need to calculate whether a gain or loss has occurred even if you do not receive any cash in the transaction. Gains and losses must also be calculated when converting from virtual currency to cash.
What about using virtual currency as a form of payment?
Whether you’re using virtual currency to pay someone or receiving virtual currency as payment for something, there can be tax implications. When reporting virtual currency received, use the fair market value on the day you received payment. Here are a few popular reasons virtual currency can be exchanged between two parties:
- Payment for goods or services (Payee): If someone uses cryptocurrency to pay you or your business for goods or services, you’ll want to report this as income. If you’re self-employed, this will also be subject to self-employment tax.
- Payment from an employer: If an employer pays you in cryptocurrency, it constitutes wages paid, and you must report it as income received.
- Payment for goods or services (Payer): If you or your business uses virtual currency to pay for goods or services, there will be a gain or loss to recognize for the funds used.
- For more information about the tax implications of using virtual currency, view the IRS FAQ located here: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.
While it may seem tedious to track every single purchase, exchange, trade, or receipt of virtual currencies, there are many apps and online platforms available that analyze the transactions and simplify tax reporting.
What the IRS is doing with cryptocurrency reporting:
The IRS is partnering with TaxBit to verify cryptocurrency tax calculations during an audit. This tax automation company is automating the cryptocurrency transaction analysis process for the IRS to understand how much money was made or lost on each transaction. When the IRS is auditing a tax filing with cryptocurrency, they’ll request the report from TaxBit, who will then provide it to the IRS and the taxpayer.
In addition to these reports, which some taxpayers may see beginning next year, the IRS has also added a question to Form 1040 asking if the taxpayer has sold, exchanged, sent, received, or otherwise acquired any financial interest in virtual currency. With the IRS requiring taxpayers to treat virtual currency as property for Federal income tax purposes, it shows they recognize virtual currencies aren’t going away any time soon.
The Treasury is currently exploring the possibility of requiring reporting on any virtual currency transfers over $10,000. We’re monitoring this and will keep you posted as more information comes to light.
For help reporting virtual currencies on your tax filings, reach out to our team of tax professionals today at (509) 663-1661. Establishing a system to track purchases, sales, and transfers before the end of the year will help ease the burden of preparing for tax season.