Do I need to report cryptocurrency to the IRS?

Your Guide to State, Local, Federal, Estate + International Taxation

Originally coined in 2009, Virtual Currency refers to “a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value.” In some environments, it operates like real currency, but it does not have legal tender status in the United States. Cryptocurrency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. And yes, you need to report cryptocurrency to the IRS.

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This type of currency has been around for over 20 years, which may shock people as it did not gain a wide audience until the Bitcoin boom of 2017 when it reached a price of nearly $20,000. The price has continued to increase and today, hovers around $60,000. Not only did this boom demand the attention of investors and anyone with the slightest interest in finances but it also put the IRS on alert. For 2020, 2021 and years going forward cryptocurrency transactions are anticipated to be a priority area of enforcement for the IRS.

Transactions in virtual currency are taxable just like those performed in any other property. However, because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, it has been easier for taxpayers to use them to hide taxable income from the IRS. Payments made using virtual currency are subject to the same reporting requirements as payments using traditional methods and may require the filing of forms such as a 1099-MISC or a 1099-NEC.

To better track this activity the IRS added a new question to the Form 1040 beginning on the 2019 form. This question specifically asks taxpayers to indicate if they received, sold, exchanged or otherwise acquired any financial interest in virtual currency during the tax year.

Taxpayers who are involved in virtual currency will need not only to answer this question yes each year but will also need to keep records documenting both the purchase or acquisition and the sale or exchange in order to calculate their gain or loss.

Taxpayers must report gains and losses on each transaction, even when the gain or loss is rather small. The IRS requires taxpayers to report all income even if they do not receive a tax form such as a Form 1099. Many questions can arise as to how to calculate gains and losses, especially when you make multiple acquisitions and transactions; more IRS guidance can be found here: Virtual Currencies | Internal Revenue Service (irs.gov)

If you have any questions about how to report cryptocurrency to the IRS, contact your Henry+Horne advisor.

Madison Williams