Cryptocurrency - Tax Relief R Us
The cryptocurrency market, including Bitcoin and other forms of digital currency, has seen unprecedented growth in recent years. This surge has left many investors trying to figure out how to navigate the complexities of tax season. Bitcoin, introduced in 2009 as the first cryptocurrency, remains dominant in this evolving landscape. However, other cryptocurrencies such as Ethereum, Chainlink, Doge, and Uniswap have also gained significant popularity. Industry experts foresee continued expansion in the use of Bitcoin and its counterparts. As a result, tax professionals must equip themselves with a thorough understanding of the tax implications associated with these transactions. Their knowledge will enable them to guide and educate their clients on compliant reporting requirements effectively.
How is the IRS Handling Cryptocurrency Transactions?
It's important to note that when filling out IRS Form 1040, the first page asks if you received, sold, or exchanged any virtual currency during the year or if you otherwise disposed of any financial interest. If you had any taxable transactions, you should answer "Yes." However, if the transaction was non-taxable, such as simply buying Bitcoin or another cryptocurrency, you should answer "No."
Reporting Taxable Transactions
As per IRS Notice 2014-21, cryptocurrency is considered as property and any capital gains or losses related to it must be reported on Schedule D and Form 8949 if required. Consequently, the most frequent crypto transactions that you must report on your tax return include:
· Selling your Bitcoin or other crypto for cash
· Trading one cryptocurrency for another cryptocurrency
· Buying goods and services with your cryptocurrency
In addition to reporting your capital gains and losses, you may need to report certain transactions as ordinary income, including:
· Receiving airdropped tokens
· Receiving tokens as a result of a hard fork
· Staking cryptocurrency
· Yield farming and Liquidity Mining
DeFi, DEX’s, Staking, Yield Farming, and NFT’s
It's important to note that the emergence of DeFi is primarily attributed to the rise of decentralized exchanges such as Uniswap and Sushiswap and smart-contract-based platforms such as Compound and AAVE. Transactions that occur on these platforms are taxable, and the IRS expects you to use your transaction history to fulfill your tax obligations.
If you're staking in a Proof-of-Stake consensus, you're locking your crypto assets into a staking pool to earn more tokens as a reward for helping validate transactions on the blockchain. Staking helps secure the network and earn passive income. Staking rewards are taxed as ordinary income rates; however, if you later sell those rewards, you will need to recognize a capital gain or loss.
Yield farming allows users to lend their cryptocurrency assets to DeFi platforms and receive a return in the form of interest, fees, or new tokens for providing liquidity. Earnings are calculated as annual percentage yields (APY) and are taxed like your staking rewards.
If you're an artist who earned money from selling an NFT, your profits are taxed at ordinary income rates. If you invest in NFTs, any profits made through sales or trades will be subject to the capital gains tax.
IRS & Crypto Exchanges
It's important to understand that the IRS is taking a closer look at individuals who invest in cryptocurrencies and fail to report it on their tax returns. The major cryptocurrency exchanges such as Coinbase, Crypto.com, Kraken, Gemini, and Robinhood are actively providing the IRS with information about their users' cryptocurrency holdings to ensure that individual reporting requirements are being met.
If you have more than $20,000 in trade volume and over 200 transactions, most exchanges will provide you (as well as the IRS) with Form 1099-K. Additionally, if you've made over $600 from crypto rewards or staking from the previous financial year, exchanges will also issue you (and the IRS) Form 1099-Misc.
It's important to note that even if you haven't received these forms, you're still obligated to report your cryptocurrency holdings to the IRS. Failure to do so can lead to significant penalties, including prison for tax fraud.
IRS Subpoenas and Warning Letters
It's important to understand that the IRS is relying on cryptocurrency exchanges to report user information and actively seeking investor information through subpoenas or John Doe Summonses (JDS). This means that the IRS can obtain the names, requested information, and documents concerning all taxpayers in a particular group. Kraken, Coinbase, and Circle are some exchanges that have already received subpoenas.
To ensure that individual reporting requirements are being met, the IRS has started sending warning letters to investors who fail to report their taxable cryptocurrency transactions accurately. These letters may come in three variants: 6173, 6174, or 6174-A. If you have received one of these letters, you are at a high risk of audit. It's crucial to note that failure to report your cryptocurrency holdings and transactions can lead to significant penalties, including imprisonment for tax fraud.
How We Can Help
Tax Relief R Us can help you avoid costly tax mistakes from receiving, selling, or transacting with cryptocurrency by accurately reporting your taxable transactions. We can also help if you’re facing an audit from the IRS for failing to report these transactions. If you didn’t keep track of your transaction history, we can find your transactions on the blockchain and include them on your tax return.
We have the experience to help you make educated and strategic decisions that promote your financial security and tax compliance. If you’re already facing the IRS and a complicated tax issue related to cryptocurrency, Tax Relief R Us can help you understand and navigate your options. We’ll begin with an honest assessment of your situation and create a plan for the best possible outcome. Achieving tax compliance can be difficult. Let us help you get there. Contact us if you’d like to learn more or schedule a risk-free and confidential consultation.
Conclusion
If you require assistance with payment plan negotiations or other tax resolution issues, speak with a CPA or a tax attorney.
Call TAX RELIEF R US at (844 829-2292 for assistance with tax issues associated with operating an Uber or Lyft vehicle. We can take the time to hear your worries and work with you to develop the finest tax resolution plan possible.
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