The IRS Will Be Looking tat Your Crypto Transactions This Year
As 2020 comes to a close that can only mean one thing - the tax season is fast approaching. I know one thing is for sure this year the IRS has its eye on crypto investors.
For those of us in the US, Form 1040 has a question about “virtual currency” near the top of the first page. This means investors must report taxable 2021 transactions involving bitcoin, ethereum, litecoin or other cryptocurrencies traded to the federal government. The list of transactions which are taxable include getting compensation in crypto, rewards for crypto mining, Airdrops or hard forks, converting crypto to cash, buying goods or services with it and converting one coin to another.
For those of us that filed in 2020 the IRS asking about crypto transactions isn’t new, but the IRS has placed more emphasis on such tax reporting as the government is looking to crack down on tax loops with spotlight has been put on the wealthy. Some officials have seen crypto as a so-called tax gap since there has been lax reporting requirements in the past. Not to mention the new $1.2 trillion bipartisan infrastructure law requires annual tax reporting by digital currency brokers starting in 2023. This tax season will be interesting as I know each year tax reporting has been more difficult. Last year I paid approx. $800 to different service as my normal tax software could not handle even the most minimal of crypto interaction.
The IRS first explicitly asked taxpayers about their crypto dealings for 2019 taxes. However, it posed the question on a Schedule 1 form, which not all taxpayers use. Now that its on Form 1040 it will be harder to avoid paying. The 2021 question is also worded differently than it was for 2020. It asks taxpayers:
“At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?”
Last year’s phrasing was a bit vague and encompassed some non-taxable transactions, like simply holding crypto or sending holdings from one digital wallet to another which confused many. The change in wording this year translates to a narrower set of transactions which is a step forward. Now I can only hope that exchanges help reduce some of the reporting burden instead of putting it all on their customers.