Bitcoin is the most popular cryptocurrency in the world and by far the most valuable. This digital/virtual currency is becoming increasingly accepted s the payment method by goods and services on the internet, and the volume of its trade is increasing every other day that passes. Traders can buy it, hold it, exchange it for any other currency, or sell it for profit online.
Although the bitcoins themselves re impossible to track, all cryptocurrency transactions made are recorded and publicly available.
Now, the Internal Revenue Service (IRS) is making it even harder for taxpayers to hide cryptocurrency transactions. The agency is making this possible, or impossible depending on the way you look t it, by adding a new question about cryptocurrency near the top of the new Form 1040, an IRS tax form used for personal federal income tax returns filed by residents of the United States.
Last week on Friday, December 11, 2020, the IRS released FORM 1040 with the question:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
The only answers you can give for this questions are either yes or no and tax professionals warned that if you answer the question inaccurately, you could find yourself in trouble with the IRS which is on a mission to clamp down on tax evaders.
Ryan Losi, a Certified Public Accountant and executive vice president of tax firm PIASCIK sys that by changing the forms to specifically say “you did or you didn’t,” the IRS is setting a trap that people evading taxes from cryptocurrency transactions could fall into in the coming years, using this data collected.
The IRS started considering cryptocurrency as a capital asset that must be taxed in 2014, just like stocks and bonds. This means that the agency taxes any gains or losses from the sale or exchange of cryptocurrency as a capital gain or loss. This includes any income generated from mining bitcoin and other cryptocurrencies.
For years, the IRS has been carrying out investigations to find out the number of investors in cryptocurrency that have been under-reporting their virtual currency holdings.
In this move, the revenue agency summoned and forced Coinbase to reveal information on 13,000 user accounts. Currently, Coinbase is the largest custodian of virtual currencies. IRS also filed a lawsuit against Bitstamp that forced the company to release more information on a taxpayer who had requested a $15,475 tax refund in an amended return.
It should be noted that this is not the first time the IRS is asking taxpayers about their cryptocurrency dealings.
According to Lewis Taub, a CPA and Director of tax services at Berkowitz Pollack Brant Advisors + CPAs, the IRS included the same question on the 2019 tax return form, but it was placed on top of Schedule 1, the form that is used to report certain additional income or adjustments to income. Its inclusion did not return the required results since most people do not file Schedule 1 with their return. That is why the agency decided to move it to the first page of the tax return this year.
Taub says that the IRS is treating omitted virtual currency transactions in the same way it tracks foreign bank accounts of U.S. taxpayers. The agency put the question near the top of Form 1040 to make it clear to cryptocurrency investors that any income from gains or losses from virtual currency must be reported on the return.
The form has instructions on how and when these virtual currency holdings and transactions must be reported.
On the upside, investors who acquire cryptocurrency and do not spend it or exchange it for other currency do not have a triggering event for tax purposes.