they also come with tax implications. The Internal Revenue Service (IRS) has taken notice and is now tracking cryptocurrency transactions to guarantee taxpayers are reporting their digital assets correctly. Learn more here https://www.cropty.com/news/startup-wants-to-suing-people-crypto.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that relies on cryptography for the security and verification of transactions, as well as to control the creation of new units. Cryptocurrency operates independently from a central bank, and all transactions are recorded on a public ledger known as a blockchain.
IRS Classifies Cryptocurrency as Property
In 2014, the IRS released guidance stating that cryptocurrency would be treated as property rather than currency for tax purposes. This means cryptocurrency transactions are subject to capital gains taxation. If you sell, trade, or use your cryptocurrency for purchasing goods or services, a capital gain or loss must be reported on your tax return.
Reporting Requirements for Cryptocurrency Transactions
The IRS requires taxpayers to report all cryptocurrency transactions, regardless of the amount. This includes purchases, sales, trades, and exchanges of cryptocurrency. Furthermore, taxpayers must keep records on all cryptocurrency transactions, such as date, type, and amount of cryptocurrency and its value in US dollars at the time of transaction.
Penalties for Non-Compliance
The IRS has intensified its enforcement activities in recent years to guarantee taxpayers are accurately reporting their cryptocurrency transactions. If you fail to file your cryptocurrency transactions, you could face serious repercussions such as fines and interest charges; in extreme cases, criminal charges for tax evasion could even be leveled against you, which could mean even larger fines and even prison time!
Reporting Cryptocurrency on Your Tax Return
Cryptocurrency is considered property for tax purposes, so you must report all cryptocurrency transactions on an IRS Form 8949 and then total them up on Schedule D of your return (Form 1040 or Form 1040NR). Furthermore, include any associated gains or losses in your total taxable income on Line 21 of Form 1040 or Line 13 of Form 1040NR.
It is essential to keep accurate records of all cryptocurrency transactions and report any gains or losses on your tax return. You may report these on Form 8949, Sales and Other Dispositions of Capital Assets, which should be included with your return.
Cryptocurrency is a rapidly expanding investment option, but it also carries tax implications. The IRS is actively tracking cryptocurrency transactions, so taxpayers must report their digital assets accurately to avoid penalties. By keeping detailed records and disclosing your cryptocurrency transactions accurately to the IRS, you can stay compliant with regulations and safeguard yourself from potential fines.