Taxes for Individuals
The IRS to continue efforts increasing tax compliance on virtual currency
According to Internal Revenue Service Commissioner Charles Rettig, the IRS remains very active in increasing tax compliance in emerging areas such as virtual currency.
Virtual currency is treated as property for tax purposes. This includes bitcoin and other forms of similar digital representations of value that act as a substitute for real currency.
Taxpayers who sell or exchange virtual currency will recognize gain or loss on the transaction. The profit or loss will be capital gain or loss if the bitcoins were held for investment,
similar to stocks or bonds. If you held the virtual currency for more than one year before selling or exchanging it, then the capital gain or loss is long-term and subject to preferential tax rules. Otherwise, it is short-term.
Taxpayers who accept bitcoin as pay for services have ordinary income equal to the value in U.S. dollars on the date of receipt. Your tax basis in the bitcoin is that same value. Employers that pay wages with bitcoin or other cryptocurrency report the U.S. dollar value on W-2s. Ditto for businesses that send out 1099 forms.
The IRS issued further guidance on the taxation of virtual currency last year. Among the topics addressed: Donating or gifting cryptocurrency. Determining tax basis and holding period in virtual currency received for services or the sale of property. Tax consequences when the currency is split into two as a result of certain software changes, commonly referred to as a hard fork. Plus tax return reporting. IRS has a set of FAQ on its website with more details.
Rules on third-party reporting requirements by brokers who effect sales of virtual currency are coming soon. Look for proposed guidance sometime in 2021.
The IRS is intensely interested in taxpayers who transact in cryptocurrency. It is using pretty much everything in its arsenal in its effort to clamp down on unreported income and other tax compliance issues resulting from these deals. Virtual currency is one of Large Business & International Division’s audit campaigns.
The agency went to federal court to get names of customers of Coinbase, a virtual currency exchange, who bought and sold bitcoin through the company. It has set up teams of agents to work on cryptocurrency-related audits. Agents are mailing a second round of letters to people who they believe have cryptocurrency accounts. This follows up on notices that IRS mailed in 2019.
More taxpayer disclosure of virtual currency is on tap, beginning in 2021. Individuals who filed Schedule 1 with their 2019 Form 1040 had to answer whether they had received, sold, sent, acquired or exchanged virtual currency. That question is moving to page 1 of the 1040 for 2020, so all filers must answer it.
From the October 16, 2020, edition of The Kiplinger Tax Letter. If you have questions about your personal situation concerning the use of virtual currency, please contact a Dugan & Lopatka professional at info@duganlopatka.com or (630) 665-4440.