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As Bitcoin and other cryptocurrencies continue to gain popularity, countries around the world are trying to figure out how to best handle them. One of the biggest challenges is determining how this new asset class will be treated when it comes to taxes. This concern is on the minds of both government officials, and the millions of people who buy, sell, or use cryptocurrencies of any kind. While there are still many questions, the IRS has recently sent out warning letters to more than 10,000 traders, which gives some insights into what the future may hold.
What Were the Letters?
The IRS sent out three different form letters to various crypto investors asking them to make sure that their taxes were filed correctly. Specifically, it mentioned that taxpayers needed to file the correct information when it comes to the gains and losses that they experienced. In one version of the letters, the IRS even said that investors should amend their tax filings under penalty of perjury.
The letters contained instructions on how traders are to calculate the fair market value of cryptocurrency holdings. The instructions stated that traders should look at the precise date and time when a transaction was conducted to identify the price at which an asset was acquired, and what it was when the asset was sold. As anyone who has traded cryptocurrency knows, it can be difficult to pinpoint the prices. Additionally, many who received this letter were “day traders” who would have made thousands of transactions over a long period of time, making it even more difficult to calculate trades.
Changing Forms & Schedules
To add additional confusion to how the IRS wants cryptocurrency handled, they indicated that cryptocurrency exchanges are going to use a 1099-K form to report customer information. This form is unlikely to produce accurate results for crypto traders. In one of the letters, it was also indicated that the correct form to use is the 1099-B, which is entirely different.
Many investors, accountants, and attorneys have attempted to contact the IRS to complain and to ask for actual guidance, about these letters and how cryptocurrency should be handled for taxes in general. At this point, the IRS has not released any additional guidance, which is making many people nervous about how this new asset class will end up being taxed. Many people even suggest that this lack of clear information is resulting in a lower price for Bitcoin and other cryptocurrencies.
Don’t Wait for the IRS
While it can be frustrating to try to figure out exactly what the IRS has in mind, you do not want to wait to see what they come up with before taking care of your own taxes. It is better to attempt to comply with taxes based on what information is available, and how similar asset classes are taxed. Once the IRS does come out with more concrete information, it is a lot easier to file an amendment to comply than to try to deal with multiple years of trades all at once. If you are a cryptocurrency investor, please contact us to discuss your tax situation right away.
Weisberg Kainen Mark, PL
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