If you’re a freelancer who has been active in the virtual currency market over the past few years, there’s a new question on your 2019 personal tax return that you should pay special attention to: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
Specifically, you’ll find this query on Schedule 1, “Additional Income and Adjustments to Income” which accompanies the 2019 version of Form 1040. You are required to check the box to affirm if you have actively used virtual currency during the tax year.
The reason why the IRS wants to know about crypto is pretty simple: virtual currency transactions are under a higher level of scrutiny to make sure they are taxed appropriately. In addition, the IRS has released updated guidance related to hard forks and air drops of virtual currency as well as updated crypto currency FAQs.
If you are trading in virtual currency or are thinking about doing so, you need to understand these basic virtual currency tax rules:
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- Crypto currency is not treated like cash. It is treated like stocks, bonds, and other investment properties. You need to report your holdings, gains and losses on Form 8949 and 1040 Schedule D.
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- When you trade crypto currency to crypto currency (calculating its fair market worth in US dollars) or to a fiat currency like the dollar it is a taxable event. It is also a taxable event when you use crypto currency to purchase goods and services. You may also end up owing sales tax.
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- Buying crypto currency with U.S. dollars is not a taxable event because you are not realizing gains when you do so. If you trade one type of virtual currency to the same kind in a wallet-to-wallet trade you may not obligated to pay tax, but you do have to account for it, depending on the exchange you are using. Make sure to check the tax rules of the specific exchange and the IRS accordingly.
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- Gift tax rules apply if you give crypto currency as a gift that is larger than the annual exclusion amount, which is $15,000 for 2019. The recipient inherits the cost basis and will owe tax when they sell or trade it.
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- If you are mining and using virtual currency as a business the general rule is that you must account for the dollar value of the coin at the time you received it and again when you trade it or use it. If you make a payment in crypto currency you must report it as well. If you receive a payment in crypto currency for your business, it is a taxable event. The rules for businesses are complex, so consider seeking the advice of a tax professional to help you.
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- You must keep track of your gains and losses each year and deduct this from your cost basis. This makes it vital to keep track of the value of any trades you make in U.S. dollars at the time of the trade.
Keep in mind that the IRS is also retroactively looking into virtual currency transactions to identify taxpayers who may have failed to report income from them in the past. If you are part of this group, you’ll need to act now, amending any outstanding tax returns and paying the tax you owe as soon as possible to avoid fines, penalties or legal action by the IRS.
If you have questions about how to report your crypto currency on your 2019 tax return or on your previous years’ returns, now is the time to contact a tax professional to help you. This is one area that the IRS is clearly focused on both this tax year and for the foreseeable future.
