Treasury Department Secretary Janet Yellen is not big on bitcoin, a point she reiterated recently when she called the digital currency speculative and “inefficient.”
That doesn’t mean Yellen and the department she leads — which includes the Internal Revenue Service — don’t care about the cryptocurrency.
Now that it’s income tax filing season, people holding bitcoin and other cryptocurrencies will see the IRS is actually very curious about a taxpayer’s cryptocurrency transactions.
So much so, they’ve tweaked the first page of the Form 1040 — the main piece of income tax paperwork taxpayers file yearly — to ask taxpayers if they’ve received, sold, sent, exchanged “or otherwise acquire[d] any financial interest in any virtual currency?”
A ‘yes’ could mean more taxes, but not necessarily so, tax experts told MarketWatch.
Cryptocurrencies keep getting a higher profile. Last week, bitcoin hit a market value above $1 trillion. As more people eye cryptocurrency, more people have to face up to the tax rules at play.
“It can be super, super easy, or it can be insanely complicated,” said Matt Metras of MDM Financial Services in Rochester, N.Y. Some transactions can spur multiple tax events at once, but tax professionals have scant IRS guidance to work off, he said.
Here’s a primer on some tax time issues when it comes to cryptocurrency.
The basics on how the IRS views cryptocurrency
The IRS treats cryptocurrency as property. It’s helpful to remember tax rules that also apply on stocks. If value goes up and the owner sells at a profit, they’ll likely pay capital gains tax.
If the sale for profit occurs within a year, the proceeds count as a short-term capital gain. That is taxed as ordinary income, which means it is lumped with other things like wages and taxed at whichever bracket the taxpayer falls into.
If the sale happens at least one year after the acquisition, then that’s a long-term capital gain. A single filer making under $40,400 and a married couple making under $80,800 get a 0% rate. Pretty much everyone else gets a 15% rate, with the rate applying to incomes up to $445,850 for individuals and $501,600 for married couples filing jointly.
That’s still a lower rate than five of the seven income tax brackets.
But cryptocurrency is volatile stuff. For example, shortly after bitcoin market value hit the $1 trillion mark, it neared a bear market.
So it’s important to remember the tax treatment for losses, said Ben Weiss, chief operating officer and co-founder of CoinFlip, which has bitcoin ATMs in 1,800 locations allowing people to buy and sell cryptocurrency.
If the value goes down and the investor sells at a loss, they get a capital loss deduction. When yearly annual loses exceed yearly annual gains, the taxpayer gets to also deduct up to $3,000/year. Excess losses beyond that can be carried forward to future tax years.
What if I get paid in cryptocurrency?
When you get paid for services via bitcoin
or any other cryptocurrency, that counts as ordinary income. It doesn’t matter what the medium of payment is when it comes to the question of “whether the remuneration constitutes wages for employment tax purposes,” the IRS said.
Cryptocurrency that an independent contractor receives for work counts as self-employment income, the IRS noted. In both cases, the value of the cryptocurrency is measured by its U.S. dollar value on the date of receipt.
So, how do I respond to this IRS question?
Near the top of the 1040, the IRS wants a ‘yes’ or ‘no’ to this question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Remember, a ‘yes’ doesn’t necessarily mean more taxes, experts said. For example, if someone just buys and holds crypto, there’s no tax event because there’s no ensuing sale for a profit or loss, Metras said. Someone like that could check ‘yes’ to the answer and not have to report the purchase in their return, he added.
Laura Walter, owner of Crypto Tax Girl just outside of Salt Lake City, Utah, says you need to say ‘yes’ if, for example, you sold cryptocurrency, traded it, spent it on goods and services, received it as compensation or received an airdrop or fork. (A hard fork can happen when a digital coin splits and an airdrop is a way to for a company to hype up a…