In a nutshell
- Bitcoin and other cryptocurrencies are considered investment property like stocks or real estate. Sales proceeds are usually taxed as long or short term capital gains, and losses can be used to offset gains.
- When changing the tax form 1040 2020, the key question about cryptocurrency moves to the first page under the name and address of the taxpayer.
- Cryptocurrency holders who don’t answer the question or are fake run the risk of higher fines if the IRS audits them as it will be harder to claim ignorance of the rules.
Cryptocurrency holders, beware: By amending the 2020 tax form, the IRS is trying to deprive millions of cryptocurrency holders of excuses it believes are ignoring tax rules.
This change moves the key question on the first page of the 1040 to a prominent place just below the taxpayer’s name and address. He says: Have you sold, received, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during 2020? The taxpayer must check “Yes” or “No”.
Owners of bitcoins and other cryptocurrencies who do not answer the question or are fake run the risk of higher fines if the IRS audits them as it will be more difficult to claim ignorance of the rules.
The new position of the question, which first appeared in a less prominent place in the 2019 tax form, is the latest attempt by the IRS to prevent cryptocurrency tax fraud. The agency also sent out letters this year to more than 10,000 cryptocurrency holders warning that they may have violated federal tax laws and should act further if they do not comply.
The IRS says cryptocurrencies like Bitcoin are proprietary.
The IRS first released a guide to taxing digital currencies in 2014. It said that bitcoin and its counterparts are property, not currencies like dollars or francs. This is often investment property, similar to stocks or real estate. Sales proceeds are usually taxed as long or short term capital gains, and losses can be used to offset gains.
This means that using Bitcoin to buy coffee or a car is not the same as using cash. The transfer usually causes taxable profit or loss, as does the sale of shares, and tax may be required.
If cryptocurrencies are held for personal use, like at home, and not primarily as an investment, then profits are taxed, but losses are usually not deductible. The IRS has not issued guidance in this area.
In 2019, the agency released more regulations in this area, including conflicting rules on splitting known as forks.
Cryptocurrency tax specialists urge holders to be careful when answering the question about Form 1040 due to its broad wording.
“Many people who have owned cryptocurrencies for a year should check the box ‘Yes’, even if they have not sold and do not have to fill out other tax forms. They don’t have to do it with stocks or bonds, ”says Chandan Lodha, co-founder of CoinTracker, a cryptocurrency tax compliance firm.
In late 2020, the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury separate from the IRS, announced that it could require US taxpayers holding over $ 10,000 in cryptocurrencies offshore to file FinCEN 114, known as FBAR, for messages about it. holdings. This rule has not yet been adopted, so it does not apply for 2020.
This year, the deadline for taxation for individuals is May 17th. Want to know more before filing your tax return? Register for free to download your free copy of the WSJ Tax Guide for 2021.
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