Beginning this season, the IRS is requesting every American taxpayer whether they received, sold, sent, traded, or otherwise acquired any financial interest in any virtual money during 2020. This question was first introduced in the 2019 Program 1. Transferring this query out of Schedule 1 to the front and center of Form 1040 suggests how severe the IRS’s looking to this space. Considering that the crypto question is placed right on the front center of this Form 1040, you are expected to see that. Moving forward, it’ll be extremely difficult to generate an excuse for not knowing about your crypto tax protection requirements.
Some people today feel that guidance on cryptocurrency taxation is not really obvious. They use this as an excuse for being compliant. Unfortunately, this is not the situation.
Also read: Bitcoin Is Taking A Breather, Relax Not Need To Worry
At the hands of most taxpayers, cryptocurrencies such as bitcoin are capital assets. Capital gains taxes have been around for decades, well before the invention of bitcoin. In any case, in 2014, the IRS took the position that cryptocurrencies are treated as land and all general tax rules applicable to property apply to crypto (Notice 2014-21). Even though there are a small number of special conditions where the legacy tax law and present generic guidance don’t offer direct jurisdiction, there is more than enough tax advice in place for a normal cryptocurrency user to properly document their taxes.
Tax Warning Letters
The IRS has been pretty competitive when it comes to sending taxation admissions to crypto users who aren’t reporting crypto holdings. The IRS sent another round of those letters in August 2020.
Crypto users will likely be getting these letters peeled about their crypto tax duties every year. Dealing with these letters, particularly the letter 6173, could be expensive and time-consuming. Most of that headache can be removed by proactively filing your crypto taxes in the first place.
Rewards are in Place to Grab Crypto Tax Evaders
If warning letters were not sufficient, the IRS is offering benefits for companies that help them grab crypto tax evaders. For example, the IRS is offering a $625,000 bounty to anyone who can break Monero and Lightning networks. Additionally, it offered a $250,000 contract to a crypto tracing software company to assist with ongoing crypto tax audits. Further, the IRS has a close ongoing relationship with crypto compliance-focused companies like Chainalysis, Coinbase Analytics, and Palantir.
Avoid Tax Audits
The statute of limitations is a legal concept that limits the IRS’s ability to audit your tax returns. Filing a tax return begins your statute of limitation for that year. The general statute of limitations is three decades. For instance, this means if you file an accurate tax return for the 2019 tax season on April 15th, 2020, the IRS just has time before April 15, 2023 (three years from the date of filing) to audit you if your return gets chosen. Following this date, the IRS doesn’t have the authority to audit your 2019 tax season.
With that said, there are two exceptions to this 3-year rule. To begin with, if you should understate your gross income by more than 25 percent, then the statute of limitations is extended to six years. Second, If you did not file any tax return, the statute of limitations not starts so the IRS can come after you at any point in time.
Thus, by filing an accurate crypto tax return you begin your three-year statute of limitations for that tax year and significantly restrict the IRS’s ability to audit you after this period ends. This is the reason why filing something is obviously better than submitting nothing. Do not skip filing and provide the IRS boundless time to audit your taxes!
Write-Off Losses
The tax code allows you to deduct your crypto trading reductions. If you’re a hobbyist investor, you can deduct up to $3,000 of capital losses every year. Additionally, you may use crypto losses to offset your inventory and other capital gains.
If you are considered a trader for tax purposes, there’s absolutely no cap on deducting capital losses in any given calendar year.
Certainly, without filing a tax return you can’t make the most of these write-offs and the associated advantages.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax pro.
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