The IRS has issued its first tax guidance for cryptocurrency since 2014, a five-year period in which the crypto industry has only gotten bigger and stronger.
It is also a period that has seen crypto tax reporting become a hot topic, especially in 2019, when the agency began its push to recoup unpaid crypto taxes. With this in mind, fresh guidance has been long overdue, to say the least.
We’ve extracted some key points, which you can read here.
How does this affect your previous tax returns?
According to industry experts: not in any particularly profound way in terms of what is taxable and what is not. The guidance merely reaffirms the IRS’ position on cryptocurrency taxation.
Most of the information is there to clarify the issues that needed clarifying, and taxpayers will no doubt know where to go in terms of tax reporting.
IRS solidifies its stance on hard forks and airdrops
One potentially sticky situation that could raise more questions than answers was addressed in the IRS’ revenue ruling. The IRS used two situations, positing that if a hard fork occurs, but one doesn’t receive fresh coins from the new chain, then they will not have received any income. However, if there is a hard fork followed by an airdrop, and one receives new coins, they will have received taxable income if they go on to sell, transfer or exchange them.
People are disappointed with this scenario, especially as people can end up with “airdropped coins” they did not ask for.
As it stands, people have to understand which hard forks and airdrops saw them receive new coins – as this is now officially income that attracts tax.
IRS guidance empowers the tax collector
The crypto community has, for several years, called for more clarity from government regulators, with the IRS telling Congress in May that it would issue just this. It has, and a quick read reveals that much of the new materials relate to standard tax rules that also apply to crypto.
The guidance makes understanding tax reporting obligations easier for crypto holders, which is one of the most important topics for them right now. However, the guidance very transparently empowers the IRS to flex its tax body muscles as it looks to squeeze every penny it legally can from the crypto industry.
The tax collector has already stated, “We know you hold and transact with crypto, and we want you to pay taxes on these transactions.” That is what the guidance is aiming to achieve. It reinforces that view and will no doubt forcibly pull more taxpayers into the compliance mold, something many cryptocurrency holders have failed to do, or have still been hesitant to do, so far.
As per the IRS, and from records that are readily available, very few people have reported on their crypto gains over the years. If you consider the staggering number of crypto accounts on platforms like Coinbase, then it’s easy to see that it’s only going to get tough if people do not begin to comply with tax rules. This has also given rise to crypto tax software which helps investors generate their tax reports and stay compliant.
Clearer rules around crypto tax reporting
Cryptocurrency tax advisors point out that the clarity the guidance brings was sorely needed by the crypto industry. From this viewpoint, we can posit that the guidance will simplify the process and approach to tax reporting for the benefit of cryptocurrency holders. Taxpayers and tax professionals can now approach crypto taxes from a far more knowledgeable position.
Up until it sent out letters specifically addressing the issue, the IRS appeared to be lagging in the area of enforcement. This meant people relied on the 2014 guidance that classified virtual currencies as property for federal tax purposes. However, crypto has grown and evolved rapidly, with new gray areas arising that the original guidance could not cover. This forced taxpayers to grapple with what was the right way to go about reporting their crypto taxes.
The IRS is saying, in a nutshell, “follow our advice and keep track of all your transactions.” According to the IRS, this is a requirement of the Internal Revenue Code. But the truth is that the main goal is for users to correctly report on their income and gains and thus pay what they owe in taxes.
No need to complicate anything
One tax attorney has commented on the new guidance by stating that people who plan on remaining non-compliant should think extremely carefully about this decision. He explains that the rules are clear on how we report on other assets like stocks, and this is the same for crypto, and if one chooses to go another route, then that only succeeds in complicating matters for this individual.
Notably, the IRS reiterates its warning to potential tax cheats. If you are a taxpayer and you hold crypto but fail to report or pay taxes on your holdings, then the risk is very clear: hefty penalties, interests and criminal investigations. Remember, the IRS has information on more than 10,000 U.S. citizens that it sent letters to in July and August. So, be smart.
And the teeny issue of crypto adoption?
If you buy a coffee using crypto, know that you need to report this when filing your returns. The IRS notes that crypto is held as a capital asset. This means that when you exchange your bitcoins for goods or other virtual currencies, you trigger a capital gain or loss.
There is no threshold on what should be taxable if you use crypto to buy goods or pay for services. You pay tax even on the tiniest of transactions. Could this affect the overall adoption of crypto? Let us know your thoughts in the comments below!
Robin Singh is the CEO of Koinly.io – a cryptocurrency tax solution that automates capital gains reporting for USA, Germany & Canada.
Elon Musk Advises Crypto Users To Secure Their Crypto Keys Properly
The crypto community has not gotten over the fact that the world’s richest man has now invested in Bitcoin and has been pretty active in the industry.
However, the community is now receiving security tips for storing cryptocurrencies from Tesla’s chief executive officer. While pointing the security of cryptocurrencies, Tesla also criticized Freewallet app, a crypto wallet for its slack in security.
He also added that crypto investors should not bother doing business with wallets that don’t provide them with private keys.
Users should store their private keys
The unique way cryptocurrencies are stored makes them not redeemable when the keys are lost. Whether the holder stores them with third-party custodians or exchanges, the owner can only claim them when they provide keys to the crypto funds.
That makes securing the keys the most important thing when dealing with cryptocurrencies. As a result, selecting the safest hot or cold wallet is a priority if users want to keep their crypto investments safe.
Elon Musk has come out to advise investors to always store their private keys personally. For a company to receive the attention of the world’s richest man is something to take advantage of to grow. However, FreewalletApp’s short conversation with Musk is a sort of negative publicity to them.
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ur welcome pic.twitter.com/e2KF57KLxb
— Elon Musk (@elonmusk) February 4, 2021
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