Whether you own cryptocurrency or not, everyone should know the tax rules surrounding this type of property as it becomes more popular. If you have one take away regarding cryptocurrency, it should be this: Remember that Uncle Sam is watching you!
Here’s what you need to know about the IRS and cryptocurrency:
Background
The IRS generally considers cryptocurrency—also referred to as virtual currency or digital currency—to be property, just like stocks and bonds for federal income tax purposes.
Therefore, if you sell cryptocurrency at a gain, it is subject to capital gains tax. Similarly, you may claim a capital loss on the sale or other disposition of cryptocurrency. But that’s not all: Anytime you exchange cryptocurrency for actual currency, goods or services, the IRS says it’s a taxable event.
Say that you hold Bitcoin for longer than one year and then sell it at a gain. The gain is taxable up to 20%. High-income taxpayers may also need to pay a 3.8% surtax on the cryptocurrency gain. Accordingly, you can use a loss from a cryptocurrency sale to offset capital gains plus up to $3,000 of ordinary income. Any excess is carried over to the following tax year.
The IRS Is Watching You!
Cryptocurrency transactions often flew under the radar, but the IRS is now paying much closer attention. Here’s how the IRS is stepping up enforcement efforts:
- Answer a Form 1040 question. The IRS is so concerned about cryptocurrency transactions being reported that they have a cryptocurrency question on Page 1 of your tax return, just below your name. Before filling out any part of your tax return, the IRS wants you to answer a question about whether you received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency.
- Brokers must report transactions. After 7 years of gently prodding taxpayers to self-report cryptocurrency transactions, Congress has given the green light for the IRS to obtain cost basis and sales proceeds information for all crypto transactions directly from brokers (such as CoinBase, Electrum or Mycelium) or other individuals who regularly provide digital asset transfer services on behalf of other people. Similar to the reporting of stocks and bonds, taxpayers will receive a Form 1099-B from brokers that list all crypto transactions. These new reporting rules are effective beginning January 1, 2023.
- Expanded $10,000 reporting requirement. Businesses that accept virtual currency as payment may be required to report transactions above $10,000 to the IRS beginning January 1, 2023. In an interesting twist, cryptocurrency and other digital assets would be considered cash for purposes of the $10,000 reporting requirement, while the IRS will continue to treat cryptocurrency as real property (and not cash) for tax compliance purposes.
What you need to do
Here are some suggestions for tracking and reporting your cryptocurrency transactions on your tax return:
- Keep up-to-date records. Consider tracking each transaction as they occur throughout the year. You may also want to keep your own transaction ledger as a way to double-check the accuracy of your broker’s statements.
- Set aside money to pay taxes. Consider saving a certain percentage of each cryptocurrency transaction you sell at a gain for taxes you may need to pay.
- Be aware before you dive into cryptocurrency. As you can see, being involved in cryptocurrency may not be for everyone. Wild swings in valuation are common. Reporting requirements are complicated.
Good News: The IRS has raised the federal estate tax exemption in 2015, allowing very large estates to shelter $90,000 more from taxes than they did last year. That means that those who are beneficiaries of substantial estates will have to pay a little less in taxes if they inherit this year.
Bad News: This is just one of many laws regarding the taxation of estates and many can be extremely complicated. There are higher tax rates for the income that estates and trusts earn, but simplified regulations when a surviving spouse asks for more time to take advantage of beneficial tax rules.
We highly recommend that – no matter what your income level – you take the time to consider estate planning concerns.