It is estimated that by the end of 2022 about 12.8% of U.S. Citizens will own some kind of cryptocurrency. At the end of 2021, it was estimated that one out of ten Americans own crypto. The IRS has made it clear that it wants its cut of the profits being made in the new cryptocurrency economy. So here are the basics about crypto and the IRS that you need to know.
THE IRS IS GETTING SERIOUS ABOUT KNOWING ALL ABOUT CRYPTO
First, you need to know that the IRS is getting very active about knowing about crypto activities. You now are required to tell the IRS on each year’s tax return if you hold crypto — even if you haven’t sold any for a profit. This is unprecedented because the IRS doesn’t ask if you own gold or fine art or stocks or any other investment vehicle. Next, the IRS wants cryptocurrency brokers to report who is buying and who is selling crypto.
CRYPTOCURRENCY BASICS FROM THE IRS
Here are some of the cryptocurrency basics that the IRS considers. The IRS says “for federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
Simply this means that you treat crypto just as you would buying and selling an ounce of gold, or an investment in a Salvador Dali lithograph, or shares in Tesla.
The IRS also wants you to know the fair market value of the crypto currency when it is bought and sold and when it is used to buy or sell other items. If you have a gain you must report the gain, and you have to know when you have a loss which may or may not be tax deductible depending on what’s bought or sold.
DID YOU MINE CRYPTOCURRENCY?
Did you get your cryptocurrency by mining it — which means using your own computers to participate in the crypto market? If you did mine cryptocurrency the IRS says what you mined is taxable. The IRS says “when a taxpayer successfully ‘mines’ virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.”
Unless you were working for someone else, when you mined the cryptocurrency you acted as a self-employed person and therefore you are also expected to pay self employment taxes.
CRYPTO AND THE SELF-EMPLOYED
And if you are self-employed and paid for your services with crypto those crypto payments are taxable employment income as well.
It is also expected that there will be federal income tax withholding on payments made with cryptocurrency.
And if cryptocurrency is paid to someone and you reach the $600 per year minimum you are expected to file a 1099-MISC for those cryptocurrency payments the same way you would report payments in U. S. dollars. But now, you must determine the value of the crypto when paid unlike dollars that are constant.
IRS HAS CRYPTO PENALTIES
And this shouldn’t come as a surprise to you. The IRS says it will have penalties on violations of these cryptocurrency rules just like there are penalties for transactions in dollars.
SEEK EXPERT GUIDANCE FOR CRYPTOCURRENCY
Yes, if you have any questions about taxes and cryptocurrency activities consult with a tax expert and especially a tax expert who knows about cryptocurrency. The tax and crypto landscape is changing rapidly. Some tax experts will advice you to file an amended tax return if you are now aware of IRS rules about cryptocurrency.
WE CAN HELP YOU CONSIDER CRYPTOCURRENCY AND THE IRS
Our tax experts can also help you consider your cryptocurrency activities and the IRS. Remember that cryptocurrency trading is now one of the top red flags that can trigger an IRS audit. We can discuss cryptocurrency during your free consultation with us. We can also discuss the IRS Fresh Start Program and the IRS Offer In Compromise Program and how to resolve your tax debt. The video below explains how easy it is to have this free telephone consultation with us.
Here again is the direct phone number to call our senior tax resolution specialist Tom at our office: 949-359-0810
Or, you can call our general number on this page to reach any of our tax resolution experts for any of your tax issues including questions about the IRS and cryptocurrency.