Curious About Crypto? So Is the IRS
Cryptocurrency is still a fairly new concept. It debuted in 2009 with Bitcoin and earned a place in the Oxford dictionary in 2013. Yet cryptocurrency is already transforming global finance.
Cryptocurrency: Digital or electronic money that uses encryption techniques to create and transfer currency units outside of a central bank.
Today, nearly 15,000 kinds of cryptocurrency are publicly traded, according to CoinMarketCap.com. The total value of all cryptocurrencies exceeds $2.5 trillion, down from an all-time high of $2.9 trillion a few weeks ago.
As more investors are venturing into cryptocurrency, the IRS is taking a keen interest, too, for two main reasons:
Trading cryptocurrency is a taxable event.
Cryptocurrency is a channel for money laundering.
In essence, the IRS regards digital currency as property for U.S. federal tax purposes. The tax principles for property transactions generally apply to cryptocurrency transactions.
Accordingly, the IRS intends to look closely at tax returns to ensure cryptocurrency-related taxes are being reported properly and accurately. Listed below are very basic instructions for reporting cryptocurrency transactions on your tax returns.
Reporting cryptocurrency
If you have bought, sold, or traded cryptocurrency, you are required to inform the IRS.
Not all cryptocurrency exchanges are directly providing users the information they need when preparing and filing their tax returns.
The process of collecting information from the cryptocurrency exchange(s) and compiling it in a reportable format is meticulous. TrueBlaze Advisors is not equipped to offer this service.
Currently there are two main viable solutions:
Use a single trading platform that tracks tax gain/loss activity for you. Coinbase will have a tax gain/loss report available starting in 2021, according to their website. But it will include only transactions initiated from Coinbase. If you’ve used multiple platforms this year, you will certainly need to look at the second option.
Use specialized software that connects with cryptocurrency exchanges, collects the appropriate data, and produces IRS Form 8949. You can then provide the form(s) to TrueBlaze Advisors to file with your tax returns. A few free or modestly priced options are TokenTax, TaxBit, and Cointracker.
If you are interested in diving deeper into the IRS guidelines, you can find it here: IRS Virtual Currency FAQs. As always, contact TrueBlaze Advisors for simplified information about your complex tax concerns.