Whether you are a seasoned trader or looking to get your feet wet, understanding the big picture of cryptocurrency is important to protect yourself financially. Cryptocurrencies have become quite popular in the most recent years. With over 4,000 different cryptocurrencies and multiple trading platforms available, more and more people have begun to take an interest in virtual currency. The term “cryptocurrency”, as defined by Oxford Languages, is a digital/virtual currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. While this new type of currency was created for the means of buying goods and services, at this time it is most commonly invested and traded as an asset such as investments or commodities.
Regulators such as the US Government and the IRS have also taken notice of this increasing trend of cryptocurrency activity and are taking charge to implement standard rules in a much-unregulated area. In 2014, the IRS released notice 2014-21 which begins to outline the tax implications of virtual currency. Alongside this notice is a series of frequently asked questions about virtual currency transactions that provides guidance to simple questions on reporting these transactions. The IRS included the following question in regards to virtual currency on the 2019 Form 1040 Schedule 1 to begin collecting information: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?.” In 2020, the IRS moved this question to the first page of Form 1040 and have publicly stated their initiatives to more accurately report your.
The way cryptocurrency is taxed may be a surprise since it is not taxed like any other currency. According to the IRS, when virtual currency is traded or used to buy goods or services, it should be treated as a sale of property. Similar to how investments are tracked by brokerage firms to report gains or losses on your income tax returns, virtual currency follows similar standards. These gains or losses are then subject to capital gains tax rules and rates. In order to report these transactions properly on your return, you should keep track of all your virtual currency transaction showing the dates purchased, dates sold, purchase price, and amount sold.
The world of Cryptocurrency is still developing and is under-regulated, which can present challenges on how to correctly report your cryptocurrency transactions. For any questions regarding this matter, please reach out to your KN+S professional or our office.
Eddie Mitchell, CPA, is a Senior Tax Accountant at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.