Taxpayers who hold cryptocurrency are faced with a dilemma this tax season. You do have to report crypto investments, but it can get tricky.
The IRS has put out a warning about how to answer the cryptocurrency question on the front page of your tax return.
It is a yes-or-no question about virtual currency, regardless of whether you “engaged in a transaction” in 2021, according to the agency. The question appears just below the taxpayer’s name and address. It’s the first question you’ll see.
The question reads: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?”
The IRS says that all taxpayers filing Form 1040, Form 1040-SR, or Form 1040-NR must check one box answering the virtual currency question, Forbes reported.
You can answer “no” if you bought and held cryptocurrency with U.S. dollars or transferred digital assets between your wallets,” CNBC reported.
Here’s the stickler. you must check off “yes” if you sold crypto, exchanged one virtual currency for another, used it for purchases, received it as payment, or acquired it through mining or staking.
According to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo, the wrong response may flag your return.
“If you check yes, you’re flagging yourself, and the IRS will be looking for capital gain or loss on your Schedule D,” Lucas said, explaining how a mismatch may result in a manual IRS review.
“That’s where the hammer comes down because they can say that you lied on a government document under penalties of perjury,” said Ryan Losi, a Richmond, Virginia-based CPA and executive vice president of accounting firm PIASCIK.
Taxpayers need to remember that cryptocurrency may be subject to capital gains when exchanged or sold at a profit. Swapping digital coins, cashing out for U.S. dollars, or even making a purchase may be taxable events, Losi pointed out.
Dgital assets held for more than a year might qualify for long-term capital gains rates of 15-or-20 percent, depending on your taxable income.
However, many crypto investors sell or exchange more often, resulting in short-term capital gains levied at regular income tax rates up to 37 percent for top earners, according to a CNBC survey.
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If you fail to report taxable crypto transcations and face an IRS audit, you may incur interest, penalties, or even criminal charges.
Not reporting could also considered tax evasion or fraud, said CPA David Canedo, a tax specialist product manager at Accointing, a crypto tracking and tax reporting tool.
There’s a significant difference between buying bitcoin in 2012 and cashing out millions of dollars in 2021 versus small trades for $100 profit, said Canedo. You still must disclose everything.
“You’re playing with fire if you don’t report it,” Canedo said.