The US Internal Revenue Service (IRS) has released a new version of its draft instructions that clarify the definition of virtual currency. The tax agency aims to guide individual taxpayers on how to fill in the 1040 form that asks them whether they bought or sold cryptoassets last year, but it still adopts a broad approach as to what constitutes these assets. According to the IRS, a transaction involving virtual currency could include, among others: Receiving or transferring virtual currency f...
The US Internal Revenue Service (IRS) has released a new version of its draft instructions that clarify the definition of virtual currency. The tax agency aims to guide individual taxpayers on how to fill in the 1040 form that asks them whether they bought or sold cryptoassets last year, but it still adopts a broad approach as to what constitutes these assets.
According to the IRS, a transaction involving virtual currency could include, among others:Receiving or transferring virtual currency free-of-charge, including from a hard fork or an airdrop;Exchanging virtual currency for products and services;Purchasing or selling virtual currency;Exchanging virtual currency for other types of properties, including other types of virtual currency;Acquiring or disposing of financial interest in a virtual currency.
The tax agency cautions individuals that if they “received any virtual currency as compensation for services or disposed of any virtual currency” that they “held for sale to customers in a trade or business,” they are required to report the income as they would report other income of the same type, such as wages, or inventory or services, as stated in the draft instructions.
"Since the inclusion of the virtual currency question on 2019 Schedule 1, what’s exactly covered under this question has been a hot topic in the crypto community and among tax practitioners due to limited instructions around it. The updated instructions attempt to demystify at least some ambiguities," Shehan Chandrasekera, Certified Public Accountant (CPA), Head of Tax Strategy at CoinTracker, a cryptoasset portfolio tracker and tax calculator, said.
Meanwhile, in a conversation between Constantin Kogan, Managing Director at investment management firm Wave Financial Group, and David Kemmerer, Co-Founder and CEO of crypto taxation software developer CryptoTrader.Tax, shared with Cryptonews.com, Kemmerer, said that what taxpayers who sold their cryptoassets report and pay to the agency depends on two main factors:
“First, is whether the holding period is long term or short term. If it is long term, which is over a year, you are supposed to report capital gains (or losses). If the holding does not exceed a year, then you are supposed to report an income,” Kemmerer said. “Usually, capital gains are charged a lower percentage than the income tax. Meanwhile, taxable events charged under the income tax regimes include airdrops, mining rewards, and interests. The second factor is your income class. Those with higher annual income tend to be charged more than those with lower income. The exact percentages are a matter of policy that changes from time to time.”
In case of a loss, it would be deducted against your ordinary income up to a certain threshold.
Looking ahead to the measures the IRS could implement to further tighten its grip over individual crypto investors, Kemmerer said that the next big thing to happen could be the IRS enforcing the 1099 information reporting requirements, in particular as a number of popular crypto exchanges, such as Coinbase, Kraken, and Gemini, have already been enforcing them voluntarily.
“If the IRS has 1099 for your exchange activity, and they don’t see any crypto income that you’ve filed, that triggers a red flag,” he said. “They will send you a letter asking why you haven’t reported crypto income they see you should have.” __ Learn more: Bitcoin & Crypto Taxes In US: When to Sell and When to Hodl Ethereum 2.0 Has Another Mystery - Taxes OECD Says It Is Working on Crypto Tax Reporting Standards for 2021