“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This is the new question that will be seen by taxpayers filling out the new Schedule 1 of Form 1040 when filing taxes this year. If you used Bitcoin or other virtual currency (also known as cryptocurrency), you will want to pay attention.
The IRS is enforcing penalties and even criminal consequences on taxpayers that are not in compliance with cryptocurrency reporting requirements.
Virtual currency functions as a unit of exchange just like other currency, but it is not considered legal tender in any jurisdiction. However, it is treated as property for federal tax purposes and must be reported when filing tax returns. The IRS has been cracking down on unreported income from cryptocurrency in a process very similar to the approach it took in investigating the reporting of offshore or foreign assets. Some individuals had hoped to use virtual currency to avoid tax liabilities, but the IRS has been pursuing information from cryptocurrency providers regarding account holders. For individuals with at least $20,000 in one transaction between 2013-2015, the IRS has requested taxpayer ID numbers, names, birth dates, addresses, account records, and invoices.
For tax purposes, any virtual currency received as payment is subject to income taxes and social security taxes.
It is based on the Fair Market Value (FMV) on the date the currency is received. It becomes a recognizable transaction when it is used to purchase goods or is converted to cash. Whether the use of cryptocurrency results in a loss or gain is dependent upon the whether the FMV of the virtual currency exceeds or is less than the taxpayer’s adjusted basis. Basis is the cash paid to purchase virtual currency or the amount recognized as income when received.
When it comes to virtual currency, there are many unresolved issues. The IRS has issued information on its website at irs.gov, where it addresses frequently asked questions related to virtual currency. However, due to the complexities of this issue, it is important to seek guidance from a tax professional when determining how to report income from cryptocurrency and ensure that you are in full compliance with tax law.