The value of Bitcoin is soaring, so if you’re planning on selling to pock some nice gains, the IRS will swiftly be at your door with their hands out. This week, the cryptocurrency hit $20,000 for one Bitcoin. Just be aware that whether you mined, purchased or sold your share of Bitcoin this year—or any other crypto—you’ll have to tell the IRS when you file your taxes next spring. [This is Why Bitcoin is Going Ballistic]
The front page of the individual income tax return, aka Form 1040, asks a yes or no question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The IRS doesn’t just want to know about whether you’ve bought or sold any crypto throughout the year.
You’re still supposed to check the “Yes” box on the front of your tax return if you received any crypto for free. Same goes for receiving your Bitcoin in exchange for goods or services or if you swapped it for other property. Furthermore, this means you’ll need to keep careful records of your transactions over the course of the year, which can get tricky if you’re swapping different cryptocurrency or using different exchanges or platforms, like Coinbase or Cash App. [$SQ]
The IRS considers virtual currency to be property— the same way it treats stocks or other investments. This way, if you buy some Ethereum and then sell it or if you swap it for something else, you’ve incurred a capital gain or a capital loss. If you captured a gain, then you’re responsible for taxes.
Here’s where things get fuzzy: Big crypto exchanges may provide taxpayers with a Form-1099k with these details – if they’ve had gross payments exceeding $20,000 and they’ve made more than 200 transactions. If you received crypto from an employer, then it’s treated like wages. Federal income taxes and FICA taxes apply. It will be reported on your W-2. What’s more, if you mine cryptocurrency, you’re also required to include it in your taxable income. You would include the fair market value as of the date you received it.
Only recently has the IRS been cracking down on unreported transactions. In 2019, the agency sent letters to more than 10,000 taxpayers with cryptocurrency transactions, ordering them to pay back taxes and file amended returns. Failing to report income can carry burdensome penalties. Worst case scenario, you could go to prison and be fined up to $250,000. ‘Mercia.