After years of flying under the radar, taxpayers who hold Bitcoin, Ethereum, Litecoin and other cryptocurrencies are finally getting their fair share of scrutiny from the IRS. The tax agency, it seems, has figured out that cryptocurrency is here to stay, and that the mind-boggling returns early adopters have enjoyed could be a boon for government coffers.
The tax agency has also figured out that many holders of cryptocurrency, from the earliest of early adopters to latecomers enticed by ever rising prices and the fear of missing out, could owe a lot on these ethereal assets. The currency may be virtual, but to the IRS the taxes due are all too real.
Note; we encourage all readers facing an IRS tax problem to contact us for a free, no-obligation, confidential consultation SmithsTaxSolutions.com/Contact. If you think you might owe back taxes on your cryptocurrencies, contact us today.
The Illusion of Anonymity
If you have been skating along under the veil of anonymity and failing to report your cryptocurrency holdings, you might want to rethink your strategy. After years of taking a largely hands off approach, the IRS is catching up in a big way, and the tax agency is pulling out all the stops to recover the money the government is owed.
Many holders of cryptocurrency are under the erroneous impression that their transactions are totally anonymous, and that there is no way for the IRS, or anyone else, to tell how much they hold or how they use their virtual coins. That may be a soothing fiction, but the reality is far different.
The truth is the IRS has a wide range of options at its disposal, from official form filings to subpoenas and legal documents, to pierce the veil of anonymity and find the real world identities of cryptocurrency holders.
Did You Get a 1099-K? So Did the IRS
In some cases, holders of cryptocurrency are finding tax forms in their mailbox. If you receive such a form, you can be sure the IRS received a copy as well.
When you file your taxes, automatic matching programs will compare the amount you claimed with the amount on these automatically generated forms. If there is a mismatch, you will be hearing from the tax agency.
One of the most common forms used to report cryptocurrency holdings and transactions is the 1099-K. For sellers on eBay and some freelancers, this form will already be familiar, but it is being extended into the virtual world as well. If you receive a 1099-K form this year, it is time to come clean with your cryptocurrency holdings.
The Cryptocurrency Question and Your Tax Form
Until now, cryptocurrency holders could, and often did, plead ignorance. They could claim they did not realize their Bitcoin, Ethereum and other virtual holdings were taxable, and they could back up that assertion by saying the IRS never asked them about these assets.
The validity of that excuse may have been questionable, but with the 2020 tax year even that thin veil of supposed ignorance will be gone. Starting in 2020, taxpayers will be asked directly if they bought, sold, transacted or otherwise acquired any cryptocurrency, and they will be expected to answer that question in a truthful manner.
The wording of this question means anyone who holds any type of cryptocurrency would be required to answer in the affirmative. Even so, simply holding virtual coins in a cryptocurrency wallet does not necessarily mean any taxes will be due. Someone who simply holds cryptocurrency but makes no transactions should not owe any taxes, just as a holder of stock does not owe taxes until those shares are sold.
The IRS is getting serious about cryptocurrency, drawn by a combination of past returns, unreported taxes and increased exposure of these alternative forms of payment. For holders of Bitcoin, Ethereum and other forms of cryptocurrency, the days of flying under the radar are over. So make this the year you come clean, so you can enjoy your cryptocurrency without worrying about the IRS.
Our firm specializes in tax resolution and our experts can also help with cryptocurrency tax questions. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm and we’ll schedule a no-obligation confidential consultation to explain your options to permanently resolve your tax problem. SmithsTaxSolutions.com/Contact.