Cryptocurrencies have gone mainstream. You can now invest in them and use them to buy and sell many products and services. However, crypto transactions have important federal tax implications that may not be well understood by everyone. Here’s an update on what you need to know about the federal tax issues if you exchange or receive Bitcoin, Ethereum or other
Cryptocurrency is also known as virtual currency or digital assets. It’s usually issued and controlled by software developers and accepted as payment by willing parties.
Cryptocurrency can be transferred, stored, held for investment or traded electronically. Unlike familiar conventional currencies, cryptocurrencies aren’t issued by government-controlled central banks, so they’re largely unrequlated.
You Have to Report Crypto…
The IRS has taken the position that crypto assets are classified as “property” for federal income tax purposes. That means you’re supposed to recognize and report taxable gain or loss every time you exchange crypto for goods, services, U.S. dollars or another cryptocurrency. If you fail to report crypto transactions on your tax return and get audited, you could face interest and penalties – and even criminal prosecution in extreme cases.
Detailed records are essential for compliance with the federal tax rules related to cryptocurrency. Your records for crypto should note:
- Date received,
- Fair market value (FMV) on the date you received it,
- FMV on the date you exchanged it,
- The trading exchange used to determine FMV, and
- Your purpose for holding it.
With this information, Borland Benefield can determine the federal income tax consequences of your crypto transactions.
Get It Right
Many taxpayers may be unaware of all the federal tax implications of cryptocurrency transactions. But the IRS doesn’t usually accept ignorance as an excuse for failure to comply with tax rules. Contact the tax professionals at Borland Benefield for help determining the implications of your transactions.