Understanding cryptocurrency tax reporting rules | Paul Pahoresky | Business

Cryptocurrency has become a very hot topic in the world of investing. The volume and activity in the world of cryptocurrency has expanded dramatically over the past five years. Cryptocurrency is even being accepted as a medium of exchange for some online purchases.

Cryptocurrency investments are subject to reporting and taxes on any investment gains just like other investment income is taxed.

As a result of the extensive growth in cryptocurrency investing and transactions, the IRS has implemented additional reporting guidelines for all taxpayers in regards to this new type of investment opportunity.

Cryptocurrency are purely digital or virtual forms of currency that are very difficult to counterfeit. The exchange of cryptocurrency is outside the traditional banking system and avoids bank transfer fees which results in very nominal processing fees and a much simpler method to transfer funds between two parties without the use of a bank or other financial institution.

The IRS has determined that cryptocurrency is property.

As a result, they are subject to capital gains and losses when a sale occurs. Like other capital asset sales, the gain or loss that occurs is the difference between your sale and your cost basis. The cost basis is generally what you originally acquired the investment for.

A taxpayer can no longer plead ignorance in regards to cryptocurrency reporting as the IRS has added a recent disclosure question to all individual income tax returns. The question is, ”Did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency.” This question initially appears on the 2019 tax year and will continue in the foreseeable future.

The IRS is aware of the ever-growing use of cryptocurrency and the fact that many of these transactions go unreported. The IRS also cannot rely on financial institutions providing 1099 forms for these transactions, as these transactions generally fall outside of the banking and financial systems.

The taxpayer must check yes to this question even if there were no taxable transactions that generated taxable income, as the IRS is increasing the monitoring of these virtual currency transactions. It is the responsibility of the taxpayer to track and report the transactions despite the fact that they will not be receiving the traditional record keeping and tax reporting forms that they are accustomed to receiving with more traditional investments.

Coin exchanges that are based in the United States file information returns with the IRS for those taxpayers with at least 200 transactions and proceeds totaling at least $20,000. These U.S. based coin exchanges file a form 1099-K, which is similar to the 1099-B that is filed for stock sales. However, the 1099-K usually does not contain cost basis. The explanation that you did not receive the 1099-K is not sufficient for the IRS similar to how not receiving a 1099-B after a security sale is not a sufficient excuse.

Mining of cryptocurrency is also gaining in popularity.

Mining either directly or as part of a mining pool creates ordinary income. If you are mining with the aim of making money, then it is considered ordinary income. If you are mining for a hobby, then you must follow the hobby loss rules which require hobbyists to report all of their income, but they cannot deduct any of the corresponding expenses.

Gifts of cryptocurrency to a charitable organization are treated in the same manner as appreciated property. You will need to receive a formal appraisal for any charitable contribution with a value of $5,000 or more. If you donate appreciated property after holding it for less than a year, your donation value is limited to cost basis.

The IRS is aware of the increasing use of cryptocurrency transactions and is now putting procedures and disclosure requirements in place to more accurately track these.

You may be subject to these reporting requirements without even knowing it, so take some time to review your situation prior to filing your taxes.