IRA Financial’s Adam Bergman Esq. discusses why the IRS is looking at you if you invest in Bitcoin, and other cryptocurrencies, outside of a retirement account.
If you are a crypto owner, be careful when you file your taxes this year with the IRS. They are watching you! If you invest in Bitcoin, Ethereum, LiteCoin, or any number of other cryptos, the IRS wants to know. If, in 2020, you bought, sold, traded any cryptocurrency, you must make that known when you file your taxes this year.
Reporting Cryptocurrency on Your Tax Return
This podcast is strictly for those crypto owners who have used personal funds. If you use retirement funds, such as a Self-Directed IRA or Solo 401(k) to invest, you don’t have to worry about taxes annually. Taxes are due when you distribute funds (or cryptos) from your plan. Of course, if you have a Roth plan, you never have to worry about taxes when you distribute during retirement.
If you have put money into cryptocurrencies last year, the IRS specifically asks this near the top of Form 1040:
It states, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Of course, if you don’t actually fill out your tax by hand, you will be asked this question if you use an online tax-filing service as well. Because of it’s placement, you cannot pretend you didn’t see the question. You must answer it truthfully.
Obviously, over the last 10-12 months, Bitcoin has skyrocketed. At one point, it was nearing $60,000, before settling in the mid-$40,000s. The IRS now wants to know who is getting involved in this emerging asset class. Remember, IRS Notice 2014-21 classified digital currency as property, like stocks or real estate, instead of actual currency. They didn’t want cryptocurrency conflicting with our own currency, the US dollar.
Tax Issues for Crypto Owners
When you buy and sell cryptos, you need to worry about capital gains and losses. Any property held less than 12 months are subject to short-term capital gains and losses. If it is held longer than 12 months, you need to worry about long-term capital gains and losses. Because of this, it’s much harder to use Bitcoin to purchase something. You need to be aware of when you acquired it, how much you paid for it, and how much it’s worth now. Did it appreciate in value? Was it held greater than 12 months?
These are questions you do not have to worry about when you pay cash or credit. One dollar is worth one dollar, no matter how long you’ve had it. There’s no need to worry about basis. The IRS is worried about keeping track of cryptocurrencies. They do not want Americans hiding these investments and not paying taxes on any gains.
What Can the IRS Do?
One thing we’ve seen already is the issuance of “John Doe” summons. They don’t care about who the individual is, they just want more information about cryptos. There’s no reason to worry about checking that “YES” box. The IRS is not going to come knocking on your door if you own Bitcoin. But if you do own Bitcoin, and don’t check that box, they may come knocking.
It does not matter if you hold the cryptos domestically, or offshore. There are tax filing requirements. Mr. Bergman goes into detail about the tax filing you must do.
If you are a crypto owner, who owns Bitcoin or other cryptocurrencies, you must let the IRS know. Again, there’s no need to worry about it, just be honest. Even if you didn’t buy or sell during the tax year, if you own some, you must say yes. Investing in cryptos is becoming increasingly popular, but tax headaches come along with it. Unless, of course, you are holding them in a tax-advantaged retirement plan.
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