Cryptocurrency taxation is one of Webb & Morton’s special areas of tax practice. We offer free assessment of all crypto tax transactions.
The IRS is serious about cryptocurrency tax enforcement and is not currently offering an amnesty program (although we argued for it in this Cointelegraph article). Partner Jason Morton has been involved in the crypto space since 2017. He recently published a Bloomberg article (again) arguing for crypto tax amnesty and has published many Blog posts on cryptocurrency; a few can be found here, here, here, here, and here. To answer many basic questions, see our cryptocurrency taxation FAQs.
The IRS mailed thousands of letters (IRS Letters 6173, 6174, and 6174-A) to crypto users in 2019 and 2020. Since then, it has been especially busy with crypto tax enforcement. In an Annual Report published in June 2020, the IRS called cryptocurrency an “important focal point”, noting a tax gap of approximately $25B. The IRS now requires taxpayers to disclose cryptocurrency positions on IRS Form 1040, page 1 – ahead of Dependents!, and the IRS recently offered a $625,000 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 losses. Knowing your adjusted basis and transactional 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 at multiple times is exhausting at best.
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. If you buy and sell property with cryptocurrency you may also have a reporting obligation and may incur capital gains and losses.
Still, there are more cryptocurrency reporting obligations to consider:
- buying or selling products with cryptocurrency
- possible FBAR implications with holding cryptocurrency on foreign exchanges
- possible cryptocurrency disclosures on IRS Form 8938
- tax basis when you receive cryptocurrency as a gift
- tax basis when you receive cryptocurrency through an inheritance
- no expectation of privacy when you engage in transactions on digital exchanges
- the intersection of cryptocurrency and estate planning (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. Cryptocurrency is clearly under the IRS microscope. We can help with crypto audits, disclosing cryptocurrency through amended returns, or general cryptocurrency tax guidance. 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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