Tax season is far, but the IRS wants to find out about your crypto holdings.
Yes, it just got a new Schedule 1 for tax season 2019, specifying the above-the-line deductions along with tax subsidies for student loan and health savings.
With this release, the taxpayers will acknowledge the extra question enlisted on the form. “Did you receive, buy, sell, exchange or hold any financial interest in cryptocurrency?
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It is the recent effort to collect extra information on your virtual currency holdings.
But, what’s important here is that IRS is doing that on purpose and it will add to your audit risk by ticking “yes” in the box.
Experts’ state, the inquiry though is a vague one.
Sarah-Jane Morin, one of the Morgan Lewis partner’s stated that she herself found the question quite frustrating, because it is unclear! As moving your own cryptocurrency from one wallet to another can be called sending.
The most traditional approach which a taxpayer can take is considering all the interactions they have had with cryptocurrency and whether there is any way that it can fall under this wide list of what you may have been engaged in in the year 2019.
All in all, the IRS has proposed to take a close look at your cryptocurrency dealings.
In July, the agency sent letters to over 10,000 taxpayers with cryptocurrency transactions who didn’t report income or paid the owed taxes.
Different tax treatments
When you sell your cryptocurrency, you have to report the transaction and if you have made some capital gain, then you need to pay the suitable tax.
Cryptocurrency if received from an employer is also a part of federal income tax holding, FICA tax and federal unemployment taxes, similar to wages. And, it needs to be mentioned in your Form W-2.
And, independent contractors being paid in cryptocurrency should also pay self-employment taxes.
If you mine cryptocurrency, then it should be included in your day receipt as gross incomes, as per IRS guidance.
If you don’t report the transactions in the right way, it may be costly. You may be audited and you will be charged with penalties. In some cases, the fine can be up to $250,000.
A taxpayer who invested in cryptocurrency should have tracking system of purchase and sale of the assets. Yes, virtual currency is treated as property, in taxes. Thus, it is important for taxpayers to main the records same way as they do for securities and stocks.
Following basis
Gathering the details to compute your taxes is easy to say than do. This is because to know the amount you owe, you have to calculate the cost basis which is the original asset value.
In the year 2018, the reporting requisitions were still getting updated to the times, according to Dan Herron CPA at Elemental Wealth Advisors in San Luis Obispo.
The procedure is simple with cryptocurrency where traders can trade on several platform and the exchange rates can differ on them vividly. And, it is the responsibility of taxpayer to track the costs.
Lumina and Bitcoin.Tax have come up with solutions to calculate cost basis. If you are a cryptocurrency trader, then you should invest in some accounting software to keep a track of your transactions. Otherwise, searching through your basis will be a disaster, according to Levine.
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