The IRS’ new tax form obliges US citizens to reveal all their crypto transactions. To complete the 2019 tax returns, you will have to fill out this form. In the form, you have to reveal whether you have participated in a crypto transaction in 2019. It is part of the growing effort by the IRS to enforce tax compliance by participants in the crypto market.
The Detail of the New IRS Tax Form
According to a CNBC report, the IRS Form has a section that asks, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” This is part of a renewed effort by the tax agency to ensure all US citizens in the crypto market pay their fair share of taxes.
However, some experts claim that this section is too vague. By responding ‘Yes,’ taxpayers could be exposing themselves to increased audit risk. For instance, moving your crypto holdings from a virtual wallet address to a cold wallet could be considered sending crypto.
The best approach for now, according to the expert is to consider your interactions with the crypto market and ask yourself whether they fall under taxable events. Indeed, the IRS itself has said it would take a closer look at the crypto sector.
In 2019, it seems like the IRS is taking on the cryptocurrency industry more than it has in previous years. Despite bearish markets, regulatory entities are starting to see the widespread use of cryptocurrencies globally. Aside from the large transaction output by Bitcoin this year, you also have other metrics surging such as “blockchain wallet users.” As you can see below, this metrics has seen 100% + growth the last 2 years, as more and more investors/traders are creating wallets to store cryptocurrency. Organizations like the IRS are starting to accept the fact that cryptocurrencies are being used, but they now want their fare share.
In July, the IRS had sent 10,000 letters to taxpayers, requesting them to comply with its taxation guidelines. It was widely speculated that the IRS had fingered the recipients of the letters by gathering data from crypto exchanges. Also just last month, the IRS stated they would now be investigating cryptocurrency ATMs and Kiosks. A Washington DC resident attempted to challenge the IRS’s collection of private crypto transaction data but the courts rejected his application.
If you sold crypto in 2019 and ended up with capital gains, you will have to pay taxes. Additionally, if an employer paid you in crypto, you will have to pay federal income tax, according to the IRS. This also applies to independent contracts such as developers, who have to pay a self-employment tax. For crypto miners, the fair market value of the crypto on the day you receive the crypto will be applied when calculating how much tax you owe. If you do not comply, you might end up paying as much as $250,000 in fines.
A Complex Process
Calculating how much you owe the IRS can be quite complex. This is in part due to the fluctuating nature of the crypto sector. Besides that, there is the fact that crypto traders usually trade on multiple exchanges. On these exchanges, the price of a single crypto asset can vary widely. The IRS has placed the onus of making accurate calculations on the taxpayer.
There are already platforms that are attempting to make it easy to make these calculations. They aggregate a trader’s crypto activity and try to calculate the cost basis of how much they owe in taxes. Financial experts recommend that avid traders invest in accounting software for calculating how much tax they owe.
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