The IRS is cracking down on cryptocurrency-related tax fraud in 2021. Over the past two years, the IRS has delivered thousands of “education letters” to cryptocurrency investors, and the agency has made clear that it will be aggressively targeting investors (“through a variety of efforts, ranging from taxpayer education to audits to criminal investigations”) who underreport and underpay their tax liability in 2021. In this article, Maryland tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses some of the resources that are available to cryptocurrency investors and provides some tips for reporting cryptocurrency investments to the IRS.
The IRS’ Virtual Currencies page provides an overview of the federal income tax treatment of cryptocurrency gains and losses. As the IRS explains, Bitcoin and other cryptocurrencies are treated as assets for federal income tax purposes, and this means that all of the following have potential tax implications:
- Selling and exchanging cryptocurrency
- Using cryptocurrency to pay for goods or services
- Investing in cryptocurrency
- Receiving cryptocurrency as business revenue
- Receiving cryptocurrency as employment income
IRS Publication 525, Taxable and Nontaxable Income
Publication 525, Taxable and Nontaxable Income, is one of the IRS’ primary resources for the public regarding federal income tax liability. While Publication 525 covers a broad range of topics, it includes various provisions that relate to cryptocurrency. This includes provisions pertaining to the tax treatment of cryptocurrency received in lieu of U.S. currency as employment income.
IRS Notice 2014-21
IRS Notice 2014-21 provides additional information regarding the federal tax treatment of cryptocurrency gains and losses. In addition to an overview of the characterization of cryptocurrency transactions for federal tax purposes, IRS Notice 2014-21 contains a list of frequently asked questions (FAQs) pertaining to various aspects of cryptocurrency tax liability.
Frequently Asked Questions on Virtual Currency Transactions
The IRS has answered additional FAQs in its Frequently Asked Questions on Virtual Currency Transactions. This reference page, which the IRS updates from time to time, currently includes 46 FAQs including:
- Will I recognize a gain or loss when I sell my virtual currency for real currency?
- How do I determine my basis in virtual currency I purchased with real currency?
- How do I calculate my income from cryptocurrency I received following a hard fork?
- Where do I report my capital gain or loss from virtual currency?
- Where do I report my ordinary income from virtual currency?
Tips for Reporting Cryptocurrency Transactions on Your 2021 Returns
Given the amount of information regarding the income tax treatment of cryptocurrency transactions the IRS has made publicly available, the agency expects taxpayers to fully comply with their reporting and payment obligations in 2021. However, even with the IRS’ guidance, this is still easier said than done in many cases. With this in mind, taxpayers who invested in or otherwise acquired or disposed of cryptocurrency in 2020 should:
- Collect all records pertaining to their cryptocurrency transactions
- Carefully calculate their “adjusted basis” in all cryptocurrency that needs to be reported
- Determine whether any FBAR or FATCA requirements apply
- Ensure that they have a clear understanding of the federal tax treatment of all pertinent types of cryptocurrency transactions
- Seek professional help as necessary
Contact Maryland Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group
Kevin E. Thorn, Managing Partner of Thorn Law Group, is a Maryland tax attorney who represents individuals and businesses in federal tax compliance and enforcement matters. To discuss your cryptocurrency tax questions with Mr. Thorn in confidence, call 240-235-5096, email firstname.lastname@example.org or request an appointment online today.Share This Post