Cryptocurrency and the IRS is a popular topic of discussion amongst advanced accountants and their clients. While some people have the misconception that IRS reporting is only required by those who trade a certain amount of cryptocurrency, failure to report to the IRS based on this notion can lead to major problems. Let’s take a closer look at one of the most common cryptocurrency tax questions and what you need to know when it comes to the IRS.
Do I Need to Report Cryptocurrency Transactions to the IRS?
When it comes to reporting, many people feel that they haven’t traded enough in cryptocurrency to worry about the IRS. This myth can get you in a lot of trouble! The rule of thumb with reporting is that any crypto trade, sale, or exchange needs to be recorded with the IRS. Whether you are actively trading or have sold, traded, or exchanged your crypto in the past year, this is a tax event that should be properly accounted for on next year’s tax return.
According to the IRS, crypto is a property. That means that any transaction involving crypto needs to be treated as a transaction on your tax return. Whether you bought a pizza or a Lamborghini or traded one currency for another in 2018, the transaction triggered a tax event. Regardless of the value of this transaction, that event needs to be recorded on your schedule D tax return.
Is Reporting Necessary with Hold All’s?
While trading, selling and exchanging most certainly need to be recorded with the IRS, the act of buying and holding crypto does not. In 2017, Bitcoin was trading for under $1,000. By December of that same year, that number rose to $19,000. So, another of the most common cryptocurrency tax questions is, “what if I bought it and held it?” In the crypto language, the process of buying and holding onto cryptocurrency is called a hold all.
If you’ve purchased cryptocurrency and held onto it for dear life. If you didn’t trade it, use it, or exchange it. If you bought the crypto and then did nothing with it, there are no reportable consequences for that process. So, buying and holding cryptocurrency is a different tax event than a transaction that involves buying and selling.
How Do I Report Cryptocurrency Transactions?
If you don’t fall within the hold all situation, you are responsible for reporting any sale, exchange, or trade of your cryptocurrency to the IRS. The burden of IRS reporting with cryptocurrency would fall on you. While a lot of currencies or securities are traded through a brokerage house, like Merrill Lynch or Charles Schwab, cryptocurrencies don’t work the same. You will not receive a form 1099 in the mail triggering you to file your tax return when it comes to most cryptocurrencies.
Coinbase, however, began to distribute 1099s recently. They announced that if you have done over $20,000 in transactions within the tax year, you will likely receive the form 1099 in the mail. In addition to your mailbox, that form will also be mailed to the IRS. That means it’s crucial for you to report these tax events to the IRS to avoid any costly penalties. Even if you don’t receive a form 1099, you are not free from reporting to the IRS. Any transactions that haven’t been included in a form 1099 should be reported on your 1040 tax return.
How Does the IRS Know That I’m Trading Cryptocurrencies?
When clients come in for cryptocurrency tax advice, another common question is “how does the IRS even know I’m trading crypto?” This is a great question because, with an estimate of over 12 million cryptocurrency accounts, we don’t actually know how many accounts truly exist. There is said to be even more crypto accounts than Charles Schwab has brokerage house accounts, meaning there’s a lot of individuals who have opened a cryptocurrency account or are trading crypto.
When it comes to the IRS knowledge of crypto accounts, Coinbase was subpoenaed in a landmark case by the IRS. The IRS forced Coinbase to turn over their account records, including account holder information, so they could line up the data provided with individuals actual reporting history. The results were astonishing because in 2015 only about 800 people were actually reporting cryptocurrency transactions during the tax year. With over 12 million accounts, that makes for a huge deficit.
The findings of this case put cryptocurrency on the radar for IRS reporting. As a result, the IRS began to crack down on account holders and their 1099 reporting. As the IRS becomes more and more aware of who is trading crypto, its crucial that you keep your own detailed records if you want to avoid potential repercussions of failing to report.
What are the Best Cryptocurrency Tax Tips for IRS Reporting?
Since the IRS has a way of finding out who has crypto accounts and the transactions that take place, it’s really important that you are very diligent about keeping records. One of the most important pieces of cryptocurrency tax advice we offer to our clients is to make it a habit to keep track of the prices of crypto when you bought it and when you sold it. Documentation is extremely important when it comes to the IRS.
Recording your transactions don’t just help with understanding what you need to report on your tax return. It also helps you track your capital gains and losses and gives you proof of any discrepancies if you feel the IRS made a mistake in your reporting. When you claim losses and gains on your tax return, you need to have solid proof of what the price was when you purchased crypto and what it was when you sold, traded, or exchanged it.
You also need to keep commissions and fees recorded so you can provide supporting documentation for all your capital gains or losses in your IRS reporting. While this isn’t directly reported to the IRS, it is included in the backup documentation you’ll provide to your tax professional to determine whether or not you owe taxes on your trading. It is also there in case the IRS audits you or you feel that you’ve received a notice from the IRS that doesn’t look correct.
Make sure you print and save all your transaction reports. There are also effective apps and online software programs that help you track your basis and any capital gains or losses. Whether you are reporting losses or gains, remember one of the most important of cryptocurrency tax tips we’ve provided, the burden of reporting is on you! With the right documentation, you can report your losses in a way to allows you to get the most from your tax return.
If navigating the world of cryptocurrency and IRS reporting still has you flustered, don’t panic. We’ve got all the answers to your cryptocurrency tax questions. For cryptocurrency tax advice from tax professionals with training and experience in crypto IRS reporting, contact us at Advanced Accounting. We’ll schedule a complimentary consultation to talk about your trading and help you better understand how it affects your taxes and what you need to do to report to the IRS the right way.
Leave a Reply