Have you considered investing in cryptocurrency but wonder what the tax ramifications will be? Although the IRS is still playing catch-up with crypto technology, they have issued some basic guidance (Notice 2014-21) which helps us answer this question. The IRS has ruled that cryptocurrencies are to be considered “property” for tax purposes, rather than “currency,” resulting in this capital tax treatment.
Reporting Cryptocurrency to the IRS
If you purchase cryptocurrency as an investment, when you sell it, the gains or losses received are to be treated as capital gains/losses. Much like stocks, there aren’t any tax reporting requirements until the cryptocurrency is sold (converted to US Dollars), traded (converted from one cryptocurrency to another), or spent (used to purchase goods). It is in that year, the capital gain/loss is to be reported on the taxpayer’s return.
Who Is Responsible For Reporting Cryptocurrency Gains?
With the sale of stocks and bonds, the brokerage firm is required to issue you with a 1099 Form reporting your sales during the tax year. There are no similar regulations yet in place for crypto-exchanges.
Some of the exchanges will issue you a statement if you have realized $10,000-$20,000 in gains or had at least a certain number of transactions. The casual investor won’t fall into this range, so the burden is upon you to figure out the taxable transactions to report on your personal tax return.
Although all sale transactions aren’t yet required to be reported to the IRS by the crypto-exchanges, that is in the works and I expect to see regulations in place before the 2017 statute of limitations expires.
The IRS Is Actively Processing Cryptocurrency Transactions And Data
In March 2018, under a recent lawsuit settlement, one of the largest crypto-exchanges was required to release its customer information to the IRS for years 2013-2015 for customers who had transactions that exceeded $10,000. The IRS is now processing that data and expects to issue notices to taxpayers regarding their unreported crypto gain transactions.
Keep A Log Of Transactions For Future Cryptocurrency Reporting
Not reporting the data on your tax return will eventually get you into trouble. If you plan to invest in cryptocurrencies, it’s important to keep track of this information about each transaction:
1) date of purchase
2) amount of US dollars you converted to a cryptocurrency
3) date of sale
4) amount of US dollars you received when you sold the cryptocurrency
To avoid IRS penalties and interest later, it is recommended that you provide this information to your tax preparer and report in on your tax return in the year of the sale.
Cryptocurrency is a whole new world, but the IRS won’t overlook it. The grey areas and taxable ambiguity won’t last, so be prepared when the reporting regulations are issued. Keep in touch with your CPA about activity to get timely and proactive advice. Feel free to email or call our office if you have questions: info@whhcpas.com
By: Sarah Moore, Manager at WHH
