Why You Need to Start Claiming Cryptocurrency for Your Taxes
Crypto came to the fore in personal finance news in 2020 and the IRS took notice. If you purchased any cryptocurrency in 2020, you will want to indicate this on your tax form, as the agency has warned that this year they will crack down on investors who are used to cheating on how much they owe.
The IRS “Traps” Your Tax Form This Year
The new IRS form makes the declaration of cryptocurrency inevitable as this simple yes or no question is at the top of your 1040 form: “Anytime during 2020 you received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency? “
CPA Ryan Lozi said in an interview with CNBC :
When you sign the form, you will be punished for perjury. The IRS simply collects data, changes forms to say directly what you did or didn’t do, and sets a trap so that the hammer may fall in years to come.
Another problem is that even when you think everything is okay, your undeclared investment in cryptocurrency can come back and haunt you. For example, if, as a result of the audit, the crypto exchange issues the latest 1099 forms, the IRS will receive a notification about your investment. Failure to pay cryptocurrency taxes could lead to tax evasion fines and possibly criminal charges of tax evasion or filing a false tax return, according to the IRS .
Do I need to answer yes to an IRS cryptocurrency question?
The IRS considers cryptocurrency to be property, not income, which means that you must list existing cryptocurrency on your tax return when you withdraw it from your account, sell or trade it. Otherwise, you don’t need to pay capital gains tax on cryptocurrency if you don’t do anything with it.
However, there is some ambiguity about cryptocurrency that just persists. As the Gordon Law Group advises :
Storage is practically the only cryptocurrency-related activity that is not specifically mentioned in the question and therefore does not require you to check yes. However, please be aware that if you receive any giveaways, this is considered a “purchase of financial interest in virtual currency”; in this case, you must answer “yes” and indicate the distribution (s) as income.
Since there is some debate about what constitutes a “holding” and whether the answer is “yes” to the question, you want to consult with a tax professional about your situation to be sure.
How much taxes will I owe?
Under US tax law, cryptocurrencies are subject to capital gains tax, but you only have to pay taxes when those profits are realized or sold. If you sold a cryptocurrency less than a year after you purchased it, any profit you make is considered a short-term capital gain and is taxed as regular income. This tax will range from 10% to 37%, depending on your tax category for 2020.
Any profit from the sale of a cryptocurrency held for more than one year will represent long-term capital gains taxed at 0%, 15%, or 20%, depending on your income. In addition, any currency-to-cash conversion or cryptocurrency exchange is considered a “taxable event” and is subject to capital gains tax.
If you lost money on crypto in 2020, the consolation is that you can at least declare a loss in your taxes and use it to offset other gains – up to $ 3,000 in your regulated gross income, thereby reducing your tax check. For this reason, you will want to keep good records of your trades, even if they are losing money. Records should include the market value of your cryptocurrency, when it was purchased and when it was used, sold, or cashed out.