Cryptocurrency had a banner year in 2020. Bitcoin, in particular, increased significantly in value in 2020. While cryptocurrency used to be a fringe currency, it is becoming more mainstream and there are many types available. As such, the IRS has caught up. Over the last few years, the agency has been more stringent about receiving their fair share. There are several reasons why you should file for cryptocurrency tax.
The IRS Is Becoming Increasingly Insistent
Back in 2019, the IRS sent several thousand letters to those who held cryptocurrency to remind them that they were under legal obligation to pay taxes on the money they make from cryptocurrency and on the income they earn in cryptocurrency. At that time, the IRS stated in a press release, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
Now, on the 2020 tax form, on page one, just below where you fill in your vital information, you will find a yes or no question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” As this statement is front and center on the form, lying about it and saying you didn’t see it is no longer credible.
You Are Legally Obligated
Just as you are legally obligated to report income earned during a tax year as well as capital gains received, you are legally obligated to report income paid via cryptocurrency and gains realized from selling cryptocurrency.
But, that also means you can report losses on cryptocurrency if you sell at a loss. You will need to use IRS Form 8949 to report your loss. However, you must sell before you report this loss. If you simply continue to hold the cryptocurrency, but it has lost value, you cannot report it.
Having said that, you are expected to keep track of and report gains, losses, and income yourself. You may receive a 1099-K if you had more than 200 transactions or $20,000 in gross proceeds. Anything less than that, and you will not receive a 1099-K. However, just because you didn’t receive a form doesn’t mean you don’t have to report any transactions.
Cryptocurrency Doesn’t Always Appear on Your Taxes
You can mark that yes, you did have a financial interest in any virtual currency and still not have a taxable event. That happens if you have cryptocurrency but did nothing with it this year; you just held it.
One of the main reasons why you should file for cryptocurrency tax is because the IRS has made a question about cryptocurrency front and center on the tax form. In addition, you don’t want to risk legal repercussions for hiding the money you may have been paid or earned through cryptocurrency.
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