IRS Moving in on Crypto Holders Who Skip Taxes
Byline: Hannah Parker
Owners of cryptocurrencies who fail to record gains on their taxes are being pursued by the Internal Revenue Service (IRS) in the United States. A New York bank was ordered by a court on Thursday to provide information on potential cryptocurrency tax evaders to the tax authorities.
Half of the bitcoin owners are holding at a profit even if cryptocurrency markets seem to be in the depths of “winter” compared to purchases made since late November 2020. Bitcoin, or any other cryptocurrency sold by U.S. taxpayers for a profit, must be reported to the IRS. it is prepared to employ all legal means at its disposal to compel compliance.
In just one year, the government seized $3.5 billion in cryptocurrency taxes that was evaded.
Should I Pay Taxes on Cryptocurrency?
For taxation purposes, the IRS views cryptocurrencies as financial property. Gains or losses on capital are treated as new sources of income.
Kathryn Hauer, a qualified financial planner at Wilson David Investment Advisors in South Carolina, commented that “it could be a real tax mess for folks who try to hide crypto earnings from the IRS”.
The IRS often sees bitcoin and its contemporaries as property, not cash, for tax purposes, assuming you aren’t getting paid in cryptocurrency for your labour (more on that below). This means that regardless of whether you sell any cryptocurrency for cash, exchange it for another digital currency, or use it to purchase a business that accepts it as payment, the difference between the price you paid when you first acquired it — known as your cost basis — and its final value is either a gain (profit) or a loss.
This implies that when you purchase a cryptocurrency, you have traded money for a property. That does not result in an IRS reporting requirement. However, the U.S. tax code mandates that if a person sells bitcoin, they must disclose any capital gains or losses on their income statement.
How Do I Pay Taxes On Cryptocurrency To The IRS?
You might get a Form 1099-K depending on your cryptocurrency exchange, the volume of transactions you make, and the overall dollar amount. There are reporting duties even if you don’t receive them.
The IRS permits taxpayers to determine capital gains or losses using their preferred accounting method. Investors in cryptocurrencies can use the FIFO, LIFO, or HIFO techniques for accounting: First in, first out, last in, first out, and highest in, and first out. It would help if you first established the cost basis to ascertain whether or not a sale generated a profit or loss. All of these approaches work for determining the cost basis.
You will pay taxes on whatever gains you have. If you owned it for a year or less, much like with other investments like stocks, any profit you gain is regarded as a short-term gain and is taxed as ordinary income. That might range from a rate of 10% to 37% for 2020, depending on your tax status.
Depending on your income, any cryptocurrency kept for longer than a year that makes a profit when sold is taxed as a long-term gain at a rate of 0%, 15%, or 20%.
Up to $3,000 of a loss can typically be carried over to the following years and offset by other income or investment gains. Maintaining a consistent accounting system during each income tax reporting year is required.
Are There Tax Exemptions To Cryptocurrency?
Cryptocurrency does not qualify for the type of exchange exemption under IRS Code Section 1031. The cryptocurrency community has been interested in this for a while because 1031 permits tax deferment for like-kind transfers.
The capital gains on the sale are not taxed, for instance, if an investor purchases a home and leases it out to generate income. The investor sells the home three years later and purchases two new homes.
However, the IRS made it clear in 2019 that the exemption does not cover cryptocurrency. Therefore, exchanging BTC for ETH, for instance, does not postpone paying taxes on any capital gains.
On page one of tax returns for 2020, the IRS has a question about bitcoin holdings that taxpayers must appropriately respond to.
Failure to disclose cryptocurrency income, whether from sales at a profit or rewards for labour, might have negative repercussions. According to certified financial adviser Kathryn Hauer, people who attempt to conceal their cryptocurrency income from the IRS risk creating a significant tax mess.
According to the Bitcoin Method Official, the U.S. taxpayers’ bitcoin holdings have long resided in legal limbo regarding reporting. However, the Internal Revenue Service and President Joe Biden, who seems determined to crack down on tax evaders, are now paying close attention to those cryptocurrency wallets. The timing is appropriate. The president needs to raise money for his ambitious economic program rather quickly. A sizable pot of money ripe for the taking is the “tax gap,” which is the difference between taxes paid and taxes owed. Charles Rettig, the head of the IRS, claims that the nation loses roughly a trillion dollars in unpaid taxes annually. He attributes this widening tax deficit, at least partly, to the development of the cryptocurrency market. The federal government is so confident in the potential revenue from unpaid taxes that the White House wants to give the IRS an additional $80 billion and greater authority to pursue tax evaders, including those who store their money in cryptocurrencies.