- A new form has been released by the IRS looking to know whether you’ve acquired, exchanged, or sold a digital currency.
- Earlier this year, the IRS sent a letter to taxpayers who’ve made transactions in cryptocurrencies to pay their taxes and file amended returns.
The Internal Revenue Service (IRS) has released a new Schedule 1 for 2019 tax season, putting out the details on above the line deductions, health savings account contributions, and tax break for student loan interest.
More notably, IRS has also thrown in a question regarding digital currencies, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
This is the agency’s latest attempt to gather more information on taxpayers’ digital currency holdings.
“The biggest thing is that the IRS is asking this for a reason, and my question is how much have you increased your audit risk by checking ‘Yes’ in response?” asked Jeffrey Levine, CPA and director of financial planning at BluePrint Wealth Alliance in Garden City, New York.
As a matter of fact, the IRS has signaled that it would take a closer look at virtual currencies.
Earlier this year, the agency sent letters to over 10,000 taxpayers who made virtual currency transactions but may have failed to report income and pay taxes on what they owed.
Tax Basics on Cryptocurrency
Have you sold any of your cryptocurrency? Then, you need to report the transactions. And if you made capital gains on that, you need to pay the appropriate tax.
In case, you received cryptocurrency from your employer, it is subject to federal income tax withholding, just like wages and should be reported on Form W-2.
Independent contractors paid in cryptocurrency must pay self-employment taxes a well.
If you are involved in mining crypto, the fair market value of the virtual currency on the day of receipt should be included in your gross income, as per IRS guidance.
Failure to report these transactions can result in you getting audited and held liable for interest and penalties. One could also face a fine of up to $250,000 and prison time, in extreme cases.
“For tax purposes, the virtual currency is treated as property, similar to a security,” said April Walker, lead manager for tax practice and ethics at the American Institute of CPAs.
So, make sure you keep track of your transactions related to virtual currency along with the cost basis.