- Bitcoin and other cryptocurrencies are considered investment property like stock shares or real estate. Sales proceeds are typically taxed as long- or short-term capital gains, and losses can be used to offset gains.
- A change to the 2020 tax Form 1040 moves a key cryptocurrency question to the front page under the taxpayer name and address.
- Cryptocurrency owners who fail to answer the question or are untruthful risk higher penalties should the IRS audit them, as it will be harder to claim ignorance of the rules.
Cryptocurrency owners, beware: by making a change to the 2020 tax form, the IRS is trying to strip away excuses for millions of cryptocurrency owners who it thinks are ignoring tax rules.
The change moves a key question to the front page of the Form 1040, in a prominent position just below the taxpayer name and address. It says: At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency? The taxpayer must check the box “Yes” or “No.”
Bitcoin and other cryptocurrency owners who fail to answer the question or are untruthful risk higher penalties should the IRS audit them, as it will be harder to claim ignorance of the rules.
The new position of the question, which first appeared in a less prominent place on the 2019 tax form, is the latest effort by the IRS to deter cryptocurrency tax cheating. The agency also sent letters to more than 10,000 cryptocurrency holders that year warning that they might have broken federal tax laws and should step forward if they weren’t in compliance.
The IRS says cryptocurrencies like bitcoin are property.
The IRS first released guidance on the taxation of digital currencies in 2014. It said that bitcoin and its kin are property, not currencies like dollars or francs. Often they are investment property akin to stock shares or real estate. Sales proceeds are typically taxed as long- or short-term capital gains, and losses can be used to offset gains.
This means that using bitcoin to buy coffee—or a car—isn’t like using cash. The transfer typically triggers a taxable gain or loss as a sale of stock would, and tax may be due.
If cryptocurrencies are held for personal use, as a home is, rather than primarily as an investment, then profits are taxable but losses typically aren’t deductible. The IRS hasn’t issued guidance in this area.
In 2019, the agency issued more rules in this area, including controversial rules on splits known as forks.
Cryptocurrency tax specialists urge holders to take care when answering the question on the 1040 form because of its broad wording.
“Many people who held cryptocurrencies during the year must check the box ‘Yes’ even if they haven’t sold and don’t have to fill out other tax forms. They don’t have to do that with stocks or bonds,” says Chandan Lodha, co-founder of CoinTracker, a firm providing cryptocurrency tax compliance.
In late 2020, the Financial Crimes Enforcement Network (FinCEN), a Treasury Department unit separate from the IRS, announced that it may require U.S. taxpayers holding more than $10,000 of cryptocurrencies offshore to file FinCEN Form 114, known as the FBAR, to report these holdings. This rule hasn’t yet been adopted, so it wasn’t in effect for 2020.
This year’s tax deadline for individuals is May 17. Interested in knowing more before you file your taxes? Register for free to download your complimentary copy of the WSJ Tax Guide 2021.
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