IRS Treatment of Cryptocurrency for the 2021 Tax Year and Beyond
Cryptocurrency plays a larger societal role, from personal income tax, retirement/estate planning, transactions, and even professional athlete salaries.
Those engaged in the crypto market will want to know how to comply with current tax laws and how to navigate the tax rule changes regarding crypto that are expected to arrive.
While crypto enthusiasts have a good case for supporting its viability, those doing business using crypto may not be aware of the tax reporting and compliance obligations that come with its use. In addition to the reliable, long-term reserve of crypto stocks with stocks, crypto investors favor mathematical algorithms that cap the cryptocurrency and prevent governments from weakening its value through inflation.
However, those who invest in crypto and those who buy and sell it will likely face new reporting/disclosure obligations as the market continues to develop. This article (the first in a series) focuses on the general federal income tax rules for virtual currency and examines potential taxpayer reporting and compliance pitfalls in this developing market.
For now, the IRS argues that cryptocurrency is a taxable capital asset, similar to traditional stocks. You realize a taxable gain if you sell your crypto for a profit, and you can claim a capital loss (potentially offsetting other income taxes) if the crypto market fell before your sale. Long-term appreciation rates, which may be favorable depending on your income, only apply to crypto if you’ve held your crypto for a year or more before selling, giving away, or trading it. ‘swap.
The record-keeping requirements of IRS Form 8949 (to report other dispositions of fixed assets) can be onerous, especially for those who conduct business using crypto throughout a given year. Additionally, the IRS can track these transactions using multiple channels. The IRS is working to “fill the virtual currency information gap” by developing third-party reporting systems (broker returns) to identify crypto transactions that cannot be easily identified on typical reporting forms, such as a W-2 form (for salary employees), a 1099-MISC form (for non-employee payments made in connection with business or commercial activities), and, more relevantly, a 1099-K form (for third-party payment network transactions made through platforms such as PayPal, Venmo, or Zelle or, in the context of crypto, a crypto exchange such as Coinbase, Binance.US, or Crypto.com).
Although the IRS has little interest in reviewing unreported virtual currency transactions of relatively low value, taxpayers who find they have failed to report and fail to act are playing a dangerous game that could result in the imposition of interest and penalties or even criminal prosecution. . Additionally, whistleblowers who report missing activity to the IRS are eligible for monetary rewards in the form of a percentage of any penalties collected. Crypto investors and traders should beware: transactions added to the blockchain are indelible. The federal government does not have a time limit for bringing civil tax evasion suits against a taxpayer.
Investors and their businesses that report no virtual currency-related income have a three-year look-back period to change past returns. They should seek professional tax and legal representation.
Nonetheless, if you are a compliance-minded crypto investor/trader, consider getting a full accounting of all your crypto activities on every platform you use. This allows you to do some of your own tax planning (e.g. determining what capital gains treatment you qualify for (long-term/short-term)), but more importantly, it ensures at least some basic tax compliance. .
Michael Pollock is an associate attorney at Wright Lindsey Jennings who advises and represents corporations and individuals in tax and commercial matters. The opinions expressed are those of the author.