The IRS has determined that cryptocurrency transactions are leading to significant amounts of unreported taxable income in the United States, and it’s taking steps to identify and collect from taxpayers who don’t report virtual currency exchanges accurately on their returns. The most visible aspect of this new IRS enforcement effort is a new question on the “Additional Income” schedule of the 1040: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” If your answer to this question is “Yes,” you need to know how to report the results of these transactions correctly on your return.
Cryptocurrency isn’t the same as cash
The key thing to understand about the taxation of virtual currency is that it’s treated much more like a share of stock than cash. You have to document its cost when you acquire it and its value when you dispose of it. In addition, conversions in its form during the time you hold it will have tax consequences. However, unlike stocks and many other types of investments, you probably won’t receive any brokerage statements that track these values for you.
Tax information reporting rules haven’t been adjusted to accommodate this new type of investment, so those who participate will have to put in more effort to ensure accurate reporting on their returns. Virtual currency investors need to document receipts, sales, exchanges, conversions, and any other dispositions as well as the fair market value on all relevant dates and the overall holding period. Most exchanges provide the ability to export the year’s transactions into an Excel document that can be fed into various third-party applications to calculate gains and losses for the year, but the ultimate responsibility for accurate reporting still rests on the taxpayer.
IRS is concerned about cryptocurrency underreporting
IRS statistics indicate that the number of virtual currency transactions in recent years has far exceeded the related tax reporting of such transactions on U.S. tax returns. As a result, the IRS has issued guidance in the form of FAQs (frequently asked questions) and announced plans to step up enforcement, both civil and, where appropriate, criminal, in this area. The new question on tax returns is just the tip of the iceberg.
The key thing to understand about the taxation of virtual currency is that it’s treated much more like a share of stock than cash.
The IRS recently went to court to force disclosure of transaction information from Coinbase, a company that administers cryptocurrency accounts. Based on this and other similar actions, the IRS now has information on millions of cryptocurrency transactions that may not have previously been reported to it.
If you’re engaging or have engaged in any cryptocurrency transactions, you need to carefully document all relevant information and report it accurately on your tax returns, including amending previously filed returns. This holds true whether you’re a trader or investor in these products, if you’ve received cryptocurrency as a gift, or if you’ve accepted cryptocurrency as a payment in the course of your business.
To learn more about how your virtual currency activities may affect your tax return, please contact your Plante Moran advisor.