The IRS is looking to take more action against taxpayers who fail to report their cryptocurrency transactions. The IRS believes that millions of transactions using cryptocurrency are not being reported, despite growing awareness regarding tax rules for cryptocurrency. The IRS considers cryptocurrency a form of property and taxpayers are required to report it correctly on their tax returns and pay the necessary taxes. Taxpayers who fail to do so can face penalties or even criminal investigations.
IRS Commissioner Chuck Rettig has moved to increase criminal investigations, meaning taxpayers could be investigated for things such as tax evasion. Last year, around 10,000 letters were sent to taxpayers who had dealt with cryptocurrency and the new 1040 for 2019 contained a question regarding cryptocurrency. A checkbox on the form requires taxpayers to answer whether they sold, sent, exchanged, or acquired a financial interest in cryptocurrency. The IRS added the checkbox to help improve compliance from taxpayers and to remind them to report their cryptocurrency transactions. Failure to check that box can carry high penalties and an increased chance of criminal investigation.
The IRS has stated that cryptocurrency is a property for tax purposes. That means you pay taxes on it if you had any type of gain from it and you can also claim losses if you suffered one from the cryptocurrency. You will need to know how much you paid for the currency and what you received for it.
The IRS has published a list of FAQs on its website to help answer taxpayers’ questions regarding cryptocurrency. The FAQs particularly emphasize that taxpayers are required to maintain excellent records to establish positions taken on tax returns. Taxpayers should keep and maintain their records documenting all their receipts, their sales or exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.