What you need to know about cryptocurrency and taxes

Finance

ROCHESTER, N.Y. (WROC) — The IRS has a warning for people dealing in cryptocurrency – pay your taxes!

CPA Dave Young discussed the emerging currency and what the IRS is doing to make sure people who deal in crypto pay their fair share Monday during News 8 at Sunrise.

“The IRS is taking a keen eye on it,” Young said of cryptocurrency. “They have a very big interest if you have cryptocurrency. As a matter of fact, on the front page of your Form 1040 in 2020 the IRS is specifically asking – at any time in 2020 did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency. The fact of the matter is if you have the virtual currency you’ll likely need to report it. Some exchanges are actually going to be sending the IRS a form and sending you a Form 1099-K saying – hey, these are the transactions that you had.”

Young explained what you need to know about reporting cryptocurrency transactions and profits or losses. “It’s going to come in a couple of different buckets. The IRS is going to treat it just as if you’re basically selling a capital asset like a stock. So if you bought a cryptocurrency and held it for more than a year you’re going to report it as a long-term capital gain. So your tax rate could be as low as zero percent or up to 20 percent depending upon your tax bracket. If it’s held less than a year it’s going to be a short-term capital gain. So it’s really important for people to realize you can trigger this by selling your crypto for cash. So you had crypto and you converted it to fiat currency cash – that’s going to be a taxable event. If you exchanged it from one cryptocurrency to another that’s another taxable event. What we see a lot is people will take their cryptocurrency and buy something. If you took your crypto and you bought a good or service, you’ve just triggered a taxable event. So those three things could trigger you having to file short or long-term capital gains. Be very, very careful because in the background the IRS is getting this report and they’re not going to look too kindly on you if you did not report this transaction on your taxes.”

Young noted that many people are getting into mining and there are considerations there too. “So mining is going to have possibly two transactions – A, the income you receive from mining the cryptocurrency. That’s going to be income. As a sidebar note, the expenses that you have related to mining will be deductible but when you sell that cryptocurrency after you mine it we’re back to triggering a capital gain, short-term or long-term. Also, what you see often is businesses are accepting crypto as a form of payment. So it’s no different than if someone pays you on a credit card or cash. It’s income so you need to report that. Sometimes your currency will hit a hard fork. If you’re into crypto you’re going to know what a hard fork is. And airdrop is kind of like a free giveaway or winning the lottery, so you might get that or even getting crypto rewards. Those are just some examples of other transactions where you need to report that. The bottom line is the IRS is taking a very hard look. So if you have crypto you want to make sure you’re reporting it and look at your 1040, page one, there should be no excuse for missing this. The IRS put it right there in plain sight. You’ve got to make sure you’re recording your cryptocurrency transactions or you will have a significant problem with the IRS.”

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