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.