In recent years, many individuals have explored the exciting world of cryptocurrency. Whether they simply expanded their own existing investment portfolio or specifically looked toward cryptocurrencies such as Bitcoin and Ethereum to start a new financial project, they might face confusing tax laws.
As the IRS increases their efforts to enforce accurate taxation on these assets, individuals will likely face troublesome and confusing situations. As the tax laws continue to evolve in this area, individuals must pay careful attention to numerous factors, including:
- Questions about cryptocurrency will directly appear on tax return forms: The lure of privacy and anonymity drew many individuals to explore cryptocurrency but the IRS has updated their forms to specifically ask about these types of assets. Officials designed the question to cover all potential areas as it includes language such as “did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
- Lack of a 1099 doesn’t mean there are no taxes: While greater reporting is coming in the near future, the IRS might not currently receive accurate information from cryptocurrency exchanges. Even if you did not receive a 1099 for the 2021 tax year, however, this does not excuse you from reporting gains and paying the appropriate taxes.
- Even the use of cryptocurrency can trigger tax liability: Individuals who limit their exposure in cryptocurrency to usage rather than trades might feel they are not liable to pay taxes. However, the liability is based on the difference between the cost basis of the cryptocurrency and the value of the goods or services that an individual received.
- Gifts and inheritance of cryptocurrency might be taxed: Whether the cryptocurrency is given or received as a gift or inherited due to the passing of a loved one, there could be tax ramifications. Based on the value of the asset, the cryptocurrency could be subject to gift taxes or inheritance taxes.
With the IRS devoting significant resources to enforcing tax liabilities and surveilling potential tax evasion, it is crucial that individuals take the time to fully understand how cryptocurrency works and how to avoid serious consequences.