U.S. taxpayers who have engaged in cryptocurrency transactions have for the most part ignored their obligation to report their crypto sales and trades on their federal (and state) income tax returns.
Now, for the first time, taxpayers are directly required to disclose on their federal tax returns filed with the IRS whether they engaged in Bitcoin or other cryptocurrency transactions at any time during the year.
More specifically, the first question on Schedule 1 of Form 1040 Individual Tax Return asks “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency.” Taxpayers must respond either “Yes” or “No,” forcing each taxpayer to directly address whether they had any cryptocurrency transactions during the year. Taxpayers who did engage in cryptocurrency transactions but answer “No” to that question could face stiff penalties (including criminal penalties).
The IRS is well aware that most US taxpayers have not been reporting income or gains from cryptocurrency transactions, and the agency is moving more aggressively to push taxpayers to “voluntarily comply” with their tax reporting obligations. In August 2019, the IRS sent letters to about 10,000 taxpayers it had identified with cryptocurrency transactions. In October 2019, the IRS issued additional guidance, through 43 questions and answers on cryptocurrency tax reporting obligations, and also issued Revenue Ruling 2019-24 addressing forks and airdrops.
In light of the IRS’ increased focus on crypto transactions, taxpayers should expect the tax collectors to more aggressively examine cryptocurrency transactions, and therefore should take steps to be compliant with their tax reporting obligations. Our best advice to clients who engage in cryptocurrency transaction is to (i) maintain detailed records of each transaction, (ii) honestly answer the required question on Schedule 1 about your cryptocurrency transactions, (iii) accurately follow the IRS’ rules for computing and reporting gains and losses from your crypto transactions, and (iv) be prepared to pay income tax that may be due on your net gains.
ABOUT JAMES MARKWOOD
James Markwood is a Principal in Offit Kurman’s Business Law and Transactions Group, based in the firm’s Tysons Corner and Washington D.C. offices. He is an experienced tax attorney, with over 30 years of experience working for AMLAW 100 Law Firms and the M&A Tax Group of a Big Four Accounting Firm. His practice now includes advising clients on tax considerations of cryptocurrency transactions.
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