Cryptocurrency is owned by more than 50% of all Americans in one form or another. If you’ve purchased, sold, donated, or otherwise transacted in cryptocurrency, or have plans to do so in the future, it is vital to understand how you need to report these activities on your tax return.
There are continuing myths out there that crypto transactions are free from taxes, but these myths can be misleading or even false. The main issue with crypto is that unlike traditional investments, where you receive a statement from your broker or investment house, there is no third-party reporting to the IRS, so their ability to monitor reporting compliance is limited. The IRS recognizes this, and recently obtained a court order summoning records from a cryptocurrency broker to look for information on taxpayers who have engaged in cryptocurrency activity, but failed to report it on their returns.
Furthermore, because crypto is a currency and not just an investment, people can use it to pay for things or it can be loaned out to others. Some transactions related to crypto can create a taxable event. In addition, different types of transactions have reporting requirements that differ in form and effect. At this point, there is insufficient guidance from the IRS, but when more robust guidance is provided, these transactions may have to be reported differently.
And if the above was not enough, all taxpayers must disclose if there is any money in a foreign bank account. Since crypto is currency, and lives in the digital world, it could be considered a foreign asset. If so, the value of those holdings would be required to be disclosed annually. There are stiff penalties for failing to disclose foreign assets on your return – up to 50% of the total value. At this time, it is undefined and unclear if crypto is considered a foreign asset and therefore if it is subject to separate reporting. The IRS is expected to provide further guidance over time.
That explained, it is clear that some transactions are taxable events, whereas others are not, as follows:
Selling or converting crypto to dollars
Trading 1 crypto for another
Spending crypto directly for goods or services
Mining crypto from your own computers
Staking or lending crypto
Receiving Airdrop crypto
Gain paid crypto in a business
Creating cryptocurrency as initial offering and receiving cash or fair market of other assets
Buying crypto with dollars
Transferring crypto between wallets
Giving crypto as a gift
Donating crypto to a charity
Hard/soft forks unless airdropped
If you are involved in crypto, you should be aware that the reporting of cryptocurrency transactions increases the time it takes to prepare your return, and you may see an increased cost from your tax preparer. Incorrectly identifying taxable or nontaxable crypto events could lead to an incorrect return.
If you have any questions about crypto transactions, as they relate to tax, please reach out to us for answers.