Many of the investors in the cryptocurrency market don’t pay taxes on their realized gains and losses. After all, a lot of people get tempted not to mention how much they made from their investments because they know that it’s currently hard for the IRS to track transactions and determine who has been evading taxes. However, there are also some who would like to put their profits on tax forms but don’t know how to, since the government has yet to provide proper guidance.
The IRS is aware of the fact that the majority of people choose not to report their cryptocurrency profits on their tax returns. Because of this, they’re doing everything that’s in their power to encourage these people to report their profits. Investors are now starting to notice that it’s best not to mess around with the IRS. It’s only a matter of time before the Internal Revenue Service comes up with a way to track transactions, and when they do a lot of people might get in trouble.
It’s always a good idea to avoid trouble with the IRS. Keep in mind that you can get a sentence of up to five years in prison and a fine of a quarter million dollars for tax evasion. “Although the IRS has made it very clear that people should report their profits, they didn’t do a very good job at providing investors with proper guidance. That’s why it’s recommended that you find a good accountant with a lot of experience with cryptocurrencies,” says Joshua V. Azran of Azran Financial.
The only official guidance that the IRS provided is known as the Notice 2014-21, which was a long time ago if you consider how long virtual currencies have even existed. In this notice, they note that cryptocurrencies should be looked at as stocks or bonds. Therefore, you’ll need to pay taxes only after you sell a virtual currency and make a profit. In other words, if you hold your money in a certain cryptocurrency, then you won’t need to report anything.
Apart from writing down your profits when you sell a virtual currency, you will also have to report it when you pay for goods and services with it. The IRS views any purchase made with a cryptocurrency as a sale of that currency and the acquirement of another asset, even if it’s just a pizza or a cup of coffee.
Since the rules for taxation of cryptocurrencies aren’t so clear, you will have to do some detective work to ensure that you report the correct figures on your tax statements. First of all, you’ll need to keep detailed records of every transaction you make using a virtual currency. It’s also on you to get 1099-K tax forms so you can inform the IRS of your gains and losses. Keep in mind that there’s a good chance you won’t receive these forms from cryptocurrency companies. After all, the only company that sends them to investors is Coinbase, which issues them to people who have made at least 200 transactions in over $20,000 worth of virtual currencies.
If you’ve been an investor for a year or two, then you probably already know that it’s almost impossible to get details on every single transaction, which is why you should always download transaction reports from the cryptocurrency exchange you use. Once you have these reports in once place, your next step is to calculate your gains and losses.
However, it looks like the IRS won’t be looking at cryptocurrencies like stocks and bonds for much longer. There is a bill that is in the works now known as the Cryptocurrency Tax Fairness Act, which aims to reclassify virtual currency as a currency. This way, people wouldn’t be required to report transactions that are less than $600 on their tax statements.