Since this year’s tax filing season, last week, the U.S. Internal Revenue Service (IRS) has provided crypto owners with important information to properly file their 2019 tax returns.
Tax season begins
The finishing date for filing and paying any tax owed is Wednesday, April 15. This is the primary time a cryptocurrency question has been included within the form. The IRS agency expects more than 150 million tax filers to reveal if they acquired or disposed of any cryptocurrencies during the tax year.
Not only the changes of 2019 Form 1040, the main U.S. tax form, but the agency also adds an inquiry regarding the acquisition or disposition of any virtual currency. The new crypto question presents on Form 1040’s Schedule 1, entitled “Additional Income and Adjustments to Income.”
IRS Commissioner Charles Rettig commented that digital currency, which is now a priority for the IRS, is an important addition to Form 1040 this year. And they want to help taxpayers understand their obligations involving virtual currency and also conduct to ensure fair enforcement of the tax laws for those who don’t follow the rules involving virtual currency.
The tax agency elaborated that 2019 taxpayers who had an engagement during a transaction involving cryptocurrency will get to file Schedule 1, the interior Revenue Code and regulations require taxpayers to maintain records that support the knowledge provided on tax returns.
The IRS made clear that taxpayers must maintain records of “receipts, sales, exchanges or other dispositions of virtual currency and therefore, the fair market price of the virtual currency.” And who did not engage in any crypto transactions in 2019 can pass Schedule 1 for this purpose. However, if you accidentally filed Schedule 1 for other non-crypto purposes, then check the “no” box for the crypto question.
Taxpayers who did not engage in any crypto transactions in 2019 can pass Schedule 1. Source: Form 1040.
Crypto income report
Following the instructions for Schedule 1, a transaction involving cryptocurrency includes the receipt or transfer of digital currency for free of charge (without providing any consideration), including from an airdrop or following a hard fork; an exchange of virtual currency for goods or services; a purchase of virtual currency; and an exchange of virtual currency for other property, including for an additional virtual currency.
The IRS provided that if a taxpayer received any cryptocurrencies as an offset for services or disposed of any coins held purchasable to customers during a trade or business, they need reporting the income as they would report other income of the same type. For example, W-2 wages are filled on line 1 of Form 1040 or 1040-SR and some are filled on Schedule C. Form 8949 will help with pointing out capital gain or loss, which will then be reported on Schedule D of Form 1040.
IRS Publication 525, entitled “Taxable and Nontaxable Income,” stated that if your employer paid you digital currency (such as bitcoin) as payment for your services, you need to write down the FMV (fair market value) of the currency in your income. The FMV of digital currency paid as wages is subjected to federal tax withholding, Federal Insurance Contribution Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2.
The agency has also provided two sets of guidance and FAQs on the tax treatment of cryptocurrencies, which was issued respectively in 2014 and in 2019. The second guidance focuses largely on hard forks and airdrops.
Crypto is a priority for the IRS in 2020
As in Progress Update for the fiscal year 2019, cryptocurrency is one of the new and rising compliance areas requiring its attention. Along with enforcement activities, it’s providing outreach and education in these areas.
In 2019, the IRS agency sent letters to approximately 10,000 crypto owners who were suspected of possibly failing to report their crypto transactions properly, adding that the letters explained the tax obligations related to virtual currency and describe how taxpayers can correct past filing and reporting errors. Noting that voluntarily compliant taxpayers need to know that noncompliant taxpayers are in danger.
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