Cryptocurrency Taxation is one of Webb & Morton’s special areas of tax practice. If you are reading this, you most likely know that IRS is serious about cryptocurrency enforcement and is not offering a tax amnesty program, to date. Partner Jason Morton has been involved in the crypto space since 2017. He recently published a Bloomberg article arguing for crypto tax amnesty and has published two Blog posts on the topic, here and here.
Since mailing 10s of thousands of IRS Letters (IRS Letters 6173, 6174, and 6174-A) to crypto users in 2019 and 2020, the IRS has been especially busy. In a published Annual Report in June 2020, the IRS called cryptocurrency an “important focal point”. The IRS also now requires taxpayers to disclose its cryptocurrency on IRS Form 1040, on page 1 – ahead of Dependents, and the IRS recently (Sept. 2020) offered a $625,000 procurement contract to pay private contractors to help IRS Cyber Agents. All indicators point to aggressive IRS enforcement.
There are several issues for crypto taxpayers to consider.
Cryptocurrency is considered “property” for tax purposes. As a result, the buying and selling of cryptocurrency can result in capital gains and capital losses. Knowing your adjusted basis and transaction details are critically important. Because cryptocurrency exchanges rarely report third-party transactions (like stock brokerage firms do), this leaves the reporting solely on the shoulders of taxpayers. And reporting multiple transactions and fees across multiple exchanges can be exhausting at best. If you need assistance with your buying and selling cryptocurrency activities, please contact us – we are here to help.
You must also report “income” if you are paid in cryptocurrency for services rendered. The IRS is clear that such payments are reportable income. And you should be aware of the types of expenses that are deductible and those that are not deductible.
Still, there are more cryptocurrency reporting obligations to consider: buying or selling products with cryptocurrency, possible FBAR implications with holding cryptocurrency in foreign exchanges, possible cryptocurrency disclosures on IRS Form 8938 (Statement of Specified Foreign Financial Assets), tax basis when you receive cryptocurrency as a gift, tax basis when you receive cryptocurrency through an inheritance, and be aware, you have no expectation of privacy when you engage in transactions on an digital exchange (see, Coinbase Summons). Further still, the intersection of cryptocurrency and estate planning is also an emerging area, as discussed on our Resources Page.
The biggest takeaway is that cryptocurrency is an evolving area in the tax world and IRS compliance and enforcement efforts are afoot. It is clearly under the IRS microscope. We can help with crypto audits or general tax guidance related to cryptocurrencies. We are well-versed in the digital world. If we can be of assistance, please contact us – we are here to help.
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