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U.S. Taxes and Cryptocurrency Holdings

Tax season is upon us and the IRS is interested in crypto income or losses. For the second year in a row, on the very first page of the 2020 1040 tax return, there is a direct question regarding “virtual currency”.

Etana does not provide tax advice and this is for informational purposes only. We have gathered some topical articles for your reference.

Is cryptocurrency treated as currency or property?

In April 2014, the IRS released a notice classifying bitcoin and other cryptocurrencies as property for taxation purposes. Under the U.S. tax code, cryptocurrencies are similar to stocks and bonds falling under the capital gains tax code. According to CoinTelegraph, “The IRS likely recognizes Bitcoin as a property asset because the popular crypto asset serves most users as an investment utility and not as a functional currency in the same way the fiat U.S. dollar does.”

CoinDesk offers some additional guidance on how the IRS views Bitcoin and other cryptocurrencies:

Capital gains tax events involving cryptocurrencies include:

  • Selling cryptocurrency for fiat (U.S. dollar, British pound sterling, Japanese yen, etc.)
  • Using cryptocurrency to purchase goods and services.
  • Trading or swapping one crypto asset for another, either on an exchange or directly peer-to-peer.

Income tax events include:

  • Receiving cryptocurrency from an airdrop
  • Any crypto interest earnings from decentralized finance (DeFi) lending
  • Crypto mining income from block rewards and transaction fees
  • Crypto earned from liquidity pools and staking
  • Receiving cryptocurrency as a means of payment for carrying out work

Record Keeping is Key

When you use a broker for stocks, they know how much you paid for the stock, what you sold it for and they also figure out your cost basis. Due to the nature of blockchain, Exchanges facilitate cryptocurrency transactions but don't know when or how you got the crypto nor what the market value was at the time.

For tax purposes keeping good records will save you time when to file your taxes. Make sure to keep track of:

  • The basis (cost plus fees) of any cryptocurrency you buy
  • The purchase date
  • If sold, the date you sold it
  • The price you sold it for

For how to answer the cryptocurrency question see the IRS instructions for the 2020 1040 form.

The more you know

The IRS is paying attention to cryptocurrency investors. Failure to pay the correct amount of your taxes involves potentially step penalties and fees. So be sure to understand how to pay taxes on your cryptocurrency, when you should do so, and how much tax you should pay.

Resources:

Bloomberg: The Critical Basics of Crypto Taxation

CNBC: Your tax return could be flagged by the IRS. Here's when it may happen

Coindesk: Crypto Tax 2021: A Complete U.S. Guide

Cointelegraph: Crypto taxes, reporting and tax audits in 2021

Cointelegraph: Crypto can be lucrative, but make sure you're ready for the taxman

IRS 2014 Note

2020 1040 Instructions

This article is for informational purposes only and should not be construed as tax or accounting advice. Always seek professional guidance from a tax accountant when assessing your individual tax situation.

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