2020 Tax Season: Have You Reported and Filed Your Crypto Returns?
For the years that cryptocurrencies have been in existence, most investors have gotten away with not reporting and filing their taxes on their crypto assets. This move was aided significantly because cryptos were still in their infancy, and no one knew how long they would last.
But times have changed. Today, more people globally are showing an interest in cryptos. Crypto mass adoption is the primary goal for most stakeholders in the industry. However, to achieve this, it is essential to establish regulatory terms for cryptos, and one way of doing so is by imposing taxes.
The IRS has been on the case of crypto taxation for a while now. The decentralized nature of the coins, however, presents a barrier in taxing the digital assets. IRS has continuously released regulations on the same, and following their recent publication, it seems that the days of crypto tax evasion are over.
Here’s a complete guide to the crypto tax rules of 2020.
IRS Regulations on Crypto Taxation
Until 2014, the IRS remained mum on the issue of taxing cryptocurrencies. The digital assets were not well known, and their decentralized nature made it even more challenging to regulate.
In that year, the Internal Revenue Service released the Notice 2014-21. In the notice, IRS clarified that it viewed cryptocurrencies as property and that it would impose general tax principles, as was the case with property transactions.
Following the notice on cryptocurrencies, the IRS made some changes to Form 1024, the US’s primary tax form. However, even with changes to the form, most crypto traders did not comply with the new regulations, and many got away with it. To get more people to file their taxes, the IRS sent out Letter 6174-A to US taxpayers who had made crypto transactions in July of 2019. The letter contained details on how to file crypto taxes and warned recipients of the penalties they would face should they fail to comply.
The IRS did not make any significant changes to the initial Notice 1024-21 until October of last year. On 9th October 2019, the IRS published new guidance on the taxation of cryptocurrencies in the US. This was the first guidance on the matter since the organization announced the state of cryptos in federal regulation. The guidance addressed tax liability issues caused by cryptos and how the IRS would value the taxation, among other things.
Now that the tax season is here once more, the IRS is keen to know the details of your crypto transactions. In December 2019, IRS released a draft of the new Form 1040, which now includes crypto holders. The new form has an addition to the question: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest on any virtual currency?”
The form’s question is pretty general, and it is not entirely clear how taxpayers can file their crypto returns. You can have a look at how to go about it below.
How to File and Pay Your Crypto Taxes
Although the IRS has been vigilant on the issue, not many changes have been made to the initial regulations. The body still treats cryptos as property and, as such, subjects the coins to property tax laws. The IRS classifies income generated from the sale of digital currencies as either a short-term or long-term capital asset depending on your holding period for the crypto.
For federal tax purposes, cryptocurrencies behave similarly to any other investment you make during the year. Say, for example, you bought tokens worth $1000 at the start of 2019 and made $500 from the coins by the end of the year. The IRS will treat this profit as ordinary income and tax it as such.
However, if you had bought the digital coins earlier, the income becomes subject to long-term capital gain taxes.
It may seem easy, but in so doing, the IRS wants crypto enthusiasts to treat the coins as long-term investments, which only raises more complications.
According to the IRS, taxable events constitute any transactions where you used a cryptocurrency as an actual currency by either receiving or sending the coins for goods and services. Crypto traders who receive tokens for their products and services have it easy since this is treated as ordinary income.
The case is not the same for those who pay for products using cryptocurrencies. One of the regulations that IRS maintains is that crypto users must retain documentation on all their trades on the blockchain. This means that if you use digital coins to pay for something, you must trace where you originally obtained the coins from. If you had the coins for under a year, any income is considered ordinary. However, long-term capital asset tax rates apply if you had the tokens for over 12 months.
Although all these may seem confusing, there are several tools available that you could choose from, to help you keep track of your transactions. However, it still helps to have a few tricks that will help you maneuver this tax season.
Tips For Filing Your 2020 Crypto Taxes
You certainly want to remain on IRS’s good books, so you must file your crypto returns correctly and in due time. There’s no telling what would happen should the IRS catch up with you, so here are a few tips to keep in mind as you prepare for tax season.
- Have detailed information on your crypto transactions. Record the date of purchase or acquiring new coins, the operations, and the sales income. To make your work easier, you can use software to help with all the calculations.
- Remember that timing is critical. The IRS differentiates between short-term and long-term holding periods from the day you first get the digital assets. The corresponding date in the next year marks the boundary, and consequently, a significant difference in the applicable tax rates.
- Always have the IRS on your radar. The body is actively seeking ways to regulate cryptocurrencies, and there are bound to be some changes. Keep checking the official IRS website for any updates to avoid being on the wrong.
- Minimizing your gains and maximizing your losses will help reduce your tax. You could either choose to hold your coins for longer or harvest your losses. As a long-term investor, your capital assets generate fewer fees than assets held for a shorter period. Harvesting your losses, on the other hand, results in capital loss and consequently offsets capital gains.
The US government is keen on imposing taxes on crypto assets and with good measure. Cryptocurrencies have gained so much popularity over the last decade, and we can expect the industry to be even more prominent soon. It, therefore, only makes sense that the IRS is hell-bent on imposing taxes.
That said, the Government Accountability Office (GAO) believes that the 2019 IRS tax guide may not be as binding as crypto enthusiasts see. GAO analyzed the IRS’s efforts to regulate cryptos and published its findings on 12th February 2020. According to GAO, the IRS tax guidance is not clear on the terms, and should taxpayers take action based on the guide, and the tax system could be undermined should the IRS release later updates.
Like most other regulatory bodies, the IRS is still trying to understand how to tax cryptos effectively, and we can expect some significant moves this year. In the meantime, it is better to be safe than sorry, so go ahead and file your crypto returns.
Featured image courtesy of Shutterstock.