It’s important to know how to answer the question on your tax return about cryptocurrencies because the IRS has issued a warning.
According to the agency, you’ll have to answer a yes-or-no question about virtual currency in 2021, regardless of whether you “engaged in a transaction.”
Tommy Lucas, a certified financial planner and enrolled agent with Moisand Fitzgerald Tamayo in Orlando, Florida, noted that an improper response might flag your return.
Asked: “Did you receive, sell, exchange, or otherwise dispose of any virtual currency?”
If you acquired and held cryptocurrencies in US dollars, or transferred digital assets between your wallets, you may answer no to this.
It is necessary to answer yes if you’ve sold crypto, traded one virtual currency for another, utilized virtual currency for purchases or got money in it, and so on.
Lucas explained that if you answer yes, the IRS will search for capital gain or loss on your Schedule D and flag you for a manual review if there is a disparity.
Experts believe that if you have taxable activity and say no, there may be more serious consequences.
Ryan Losi, a CPA and senior vice president of accounting company PIASCIK located in Richmond, Virginia, stated, “That’s where the hammer comes down because they may claim that you misled on a federal document under penalties of perjury.”
If you’re not sure what to report, talk to a tax specialist who specializes in cryptocurrency. However, as the deadline for April 18 draws nearer, things may get more difficult.
What you need to know about cryptocurrency taxation.
When a cryptocurrency is traded or sold for a profit, it may be subject to capital gains taxes. When it comes to digital currency transactions, Losi said that everything from trading digital coins to withdrawing cash in the form of US dollars to making a purchase could be considered taxable events.
To calculate a profit or loss on a sale or exchange, you divide your purchase price by the current market value, and your tax rate depends on the length of time you’ve had your property.
Tax rates for long-term capital gains on digital assets held for more than a year might range from 0% to 15% to 20% depending on your taxable income.
Short-term capital gains are taxed at standard income tax rates, up to 37 percent for the highest incomes, according to a CNBC study of cryptocurrency investors.
Furthermore, with limited information provided by digital currency exchanges, determining your basis for calculating your crypto tax obligation may prove difficult.
Absence of reporting
In the event of an IRS audit, you may be subject to interest, fines, or even criminal charges if you fail to declare your taxable crypto activity.
A Milwaukee-based CPA and tax specialist product manager at Accounting, a crypto monitoring, and tax reporting tool, says it might be considered tax avoidance or fraud..
IRS officials, he warned, may go after higher amounts of money despite the agency’s limited staffing resources.
If you don’t report it, you’re playing with fire. The following is a statement by David Canedo: CUSTOMER SERVICE MANAGER FOR ACCOUNTING
For example, if you acquire bitcoin in 2012 and payout millions of dollars in 2021, there’s a huge difference between small trades for $100 profit and large trades for millions of dollars. Regardless, you must share all the information.
“If you don’t report it, you’re playing with fire,” he said.
There is no statute of limitations for fraud, according to Canedo, notwithstanding the IRS’ three-year look-back period.
According to Losi from PIASCIK, another danger is that of IRS whistleblowers who can reveal missing activity in exchange for a part of the penalties collected.
According to him, the most common way the IRS discovers tax evaders is through a former business partner or former spouse.