Better tell the IRS or else!

Got bitcoin or other crypto? It could come back to bite you if you don’t let the IRS know about it.

Regardless of how you interacted with any cryptocurrencies last year, you’re expected to include the information on your 2020 tax return. And for those who had income from virtual currency — whether due to selling at a profit or getting paid crypto for work performed — failure to report it may haunt you.

“It could be a real tax mess for folks who try to hide crypto earnings from the IRS,” said Kathryn Hauer, a certified financial planner with Wilson David Investment Advisors in Aiken, South Carolina.

For instance, “just because in one year an entity that paid you doesn’t report that payment, a year from now when the entity gets audited and issues late 1099 forms, the IRS will expect you to have reported what you earned,” Hauer said.

The IRS has put crypto front and center for this tax-filing season. High up on the first page of your tax return, a yes or no question is posed: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

In other words, no matter how it came into your possession, you are expected to tell the IRS about it.

While the price of bitcoin has dropped this week, falling to below $48,000 on Tuesday after hitting about $58,000 on Sunday, its upward trajectory last year likely means there are capital gains to report. One coin was worth roughly $29,000 at the end of 2020, after starting the year out at about $7,300.

Of course, if you owned, say, bitcoin, but engaged in no related transactions last year (i.e., you just held it), you had no taxable event. Nevertheless, you would answer yes to the tax-form question.

In 2019, the IRS sent letters to more than 10,000 taxpayers with crypto transactions who may have failed to report income and pay taxes owed.

Now, especially with the question on page 1, it’s a lot harder to say you didn’t know you were supposed to report it.

“At that point, the IRS said ‘We’ll let you fix this,’ but is less likely to do that moving forward,” said Knox Wimberly, an IRS enrolled agent and the CEO of Taxaroo.

“Now, especially with the question on page 1, it’s a lot harder to say you didn’t know you were supposed to report it,” said Wimberly, who also is a fellow with the National Tax Practice Institute.

Assuming you aren’t getting paid crypto for work you do (more on that further below), the IRS generally views bitcoin and its brethren as property, not currency, for tax purposes. This means that whether you sell any crypto for cash, trade it for another digital currency or use at a merchant that accepts it as payment, the difference between what you initially bought it for — your cost basis — and its value upon sale is either a gain (profit) or a loss.

“The taxable transaction is not only when you convert to U.S. dollars,” Wimberly said. “It can occur at any point you sell or exchange it.”

Depending on the crypto exchange you use and how many transactions you engage in — and the aggregate dollar amount — you may receive a Form 1099-K. Even if you don’t receive it, there are reporting requirements.

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5 Responses to GOT BITCOIN?

  1. President Elect Toxic Deplorable Racist SAH B Woodman Domestic Violent Extremist says:

    Once again, we see that the overreaching Gooberment can fuck up a wet dream.
    I thought that was the whole purpose behind why blockchain/Bitcoin was invented, was to be invisible to, anonymous, and circumvent the grasping greed of Gooberment.
    Really, with all the anonymity (supposedly) built into blockchain, if you lie to the IRS (a worthy goal in and of itself), how will they know?

  2. antzinpantz says:

    A few dollars here or there no one will know. But soon, in an effort to become legitimate, Bitcoin will report all sales and purchases. Plus some people purchased a few hundred dollar years ago with is now worth millions. You can bury that under a mattress so when you buy that house or boat or whatever and haul in a wad of cash, the IS WILL be notified. And then you’ll have to report where you, a middle class American, got your hands on so much cash…..all of a sudden.

  3. RedneckGeezer says:

    I don’t doubt this has some truth, but I also cant’ help but believe this is a scare tactic that is being used to keep people honest. We need to hurry up and just get to full blown communism so everyone is equally miserable and even the leftists hate the “elite”, er… the government.

  4. President Elect Toxic Deplorable Racist SAH B Woodman Domestic Violent Extremist says:

    Anyone who has plotted, planned, schemed and with more than one brain cell to rub together, will know that you don’t just suddenly appear with a ‘barrow full of cash. You spread it out, little by little, over a long period of time. Your “house”, for example. You go through all the normal approval steps, using your normal income. But as you make your normal mortgage payments (from working income), you put in some additional Bitcoin payments. For every $1000 of normal payments, you add $200-$500 of Bitcoin payments. Make it look like you’re scrimping and saving from your income to make those additional payments.
    And instead of a 30 year mortgage, you’re done in 10-15-20 years. And no one the wiser for your undeclared early Bitcoin investment.

  5. bogsidebunny says:

    So much for the Constitution being an instrument that protects the people from an over-reaching government.

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