This year was like no other. Now that it’s coming to an end and we are looking at the promise of a better 2021, it’s time to think about taxes. While there were many other notable things in 2020, there were some tax points to enjoy – and others to fear.
Gains and losses
It is difficult to look at crypto and 2020 without commenting on gains and losses. Bitcoin (BTC) has risen in price, which has made many investors happy. If you have taken short positions, you are obviously less satisfied. And if you’ve invested in XRP, the news that the U.S. Securities and Exchange Commission is dissatisfied with XRP has caused some price impact in the unwanted direction. In terms of actual and perceived value and purchasing power, these developments are important. But what about taxes?
Related: SEC vs. Ripple: A Predictable but Unwanted Development
Tax Day Delay: IRS Softer?
Tax returns for 2020 must be paid by April 15, 2021, which is not too far away. Do not count on a delay like last year. In 2020, the Internal Revenue Service gave us all a 90-day deferral for filing and repayment, until July 15, 2020 (IRS notice 2020-17). The world may still be in the grip of COVID-19 during the upcoming tax filing season, but most observers do not expect the same latitude from the IRS when it comes to 2020 tax returns.
The same can be said for the IRS which facilitates many of its enforcement activities. In early 2020, IRS Commissioner Chuck Rettig announced the “People First Initiative”. Do you have to pay tax in installments? The IRS will help because it is a well-weathered process to work out installment payments. In addition, the installments due between 1 April and 15 July 2020 have been suspended, as well as tax levies and levies. Even new passport debt certificates are drawn up when offending tax debt exceeds $ 50,000, and most new tax audits are also pending.
What about now early in 2021? Many IRS employees still work mostly remotely, but do not assume that this means that you will be a little sluggish in early mid or 2021 that taxpayers received in 2020. This is highly unlikely. How about the IRS or in court arguing that you do not have to pay IRS fines because the pandemic affected you negatively? You can try this, but the IRS commissioner has already pushed hard on proposals that the IRS should have a special pandemic allowance for fines. Again, do not count on it.
IRS forms for crypto-tax
Two years ago, the IRS crypto made a kind of tax issue for everyone by adding a question to everyone’s tax return, and the same thing happened with 2020 tax returns. This means that the IRS will start you off with a simple question with the tax returns for 2019 that will be submitted in 2020:
“Have you at any time received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency?”
It’s pretty simple: just yes or no; it does not ask for numbers or details, but it will appear elsewhere on your tax return.
This addition for 2019 returns is continued for the returns for 2020 that you submit in 2021. You should actually assume that this will henceforth be a standard feature of tax returns. Because the IRS classifies crypto as property, any sale is going to yield a profit or loss, and a yes or no box can prove to be quite important. Given the IRS’s record with foreign bank accounts, it could mean even large fines or even jail time.
The tax department of the justice department has successfully argued that the mere failure to mark a box with the reporting of foreign accounts is willful. Intentional failures involve higher fines and increase the threat of criminal investigation. The IRS’s Criminal Investigation Division even meets with tax authorities from other countries to share data and enforcement strategies to find potential tax evasion. It seems to be reminiscent of the foreign bank account question included in Schedule B.
If a taxpayer answers “No” and then discovers that he has had transactions with cryptocurrency during the year, the fact that they have answered explicitly No to this new question (under penalty of perjury) can be used against them. What if you only have a kind of “signature authority” over crypto owned by your non-computer-skilled parents or other family members? This way you can help them manage their crypto.
If you sell a parent’s crypto on their behalf, at their request and / or for their benefit, should you answer the question ‘Yes’ or ‘No’? Several escrow and trust arrangements – some informal, others not – have flourished. They can be sensitive, especially now with the much greater access to the IRS. But be careful who sells it and how such activities are reported.
Do you need to add a statement to the return that explains your relationship with the digital currency? There are probably no perfect answers to this question, but what is clear is that answering ‘no’ when the truth is ‘yes’ is a big mistake. Skipping the boxes may not be so bad, but it’s not good either if the truth is ‘Yes’. If the truth is ‘Yes’, then say so, and remember your income, profits, losses, etc. Announce and report. Perhaps this is the point of the question: to be a prominent memory.
Other tax forms
Do not think that your tax return is the only tax form you will see. Although crypto still escapes some reporting forms, it is much less true today than it was before. What about IRS Forms 1099-MISC, 1099-K, 1099-B or Schedule K-1? There’s even the new Form 1099-NEC for the 2020 tax return season.
All of these forms can report crypto payments and transactions. These forms arrive around the end of January for payments or transactions made in the previous calendar tax year. Wages paid to employees in digital currency must be reported on a Form W-2 and are subject to withholding tax and federal income taxes.
Salaries made in digital currencies made to independent contractors are taxable for them and business payers must issue Form 1099-NEC. A payment made with a digital currency is subject to reporting on Form 1099, just like any other payment made on property. This means that if a person in the enterprise pays crypto worth $ 600 or more to an independent contractor for services, a Form 1099 is required.
If you receive any forms 1099, keep an eye on it. Each is reported to the IRS (and the state tax authorities). If you do not report or otherwise address the reported income on your tax return, you can expect the IRS to follow it up.
Transactions cause tax
In 2014, the IRS announced that crypto is property. If you had 100 BTC and you sold 10, which 10 did you sell? There is no perfect answer to this question. Most tax laws take stock of shares into account, not cryptocurrency. Specific identification of what you are selling, when you bought it and for what purchase price is probably the cleanest. But that may not be possible. Some people use an average convention, in which you calculate your average cost over a number of purchases. Consistency and record keeping are important.
IRS audits and access to information
The IRS uses software to detect crypto and has also accessed records through other sources. In addition to the forms 1099 and K-1 being issued, many reports are now being dropped in the lap of the IRS. This should be of concern to taxpayers.
The IRS now has crypto training for its auditors and agents for the Criminal Investigation Division. Should the latter scare you? I think so. The IRS and the Department of Justice continue to bring criminal charges, primarily with regard to crypto-use for illegal purposes that include other crimes, such as money laundering or child pornography. But that is no guarantee.
In addition, most criminal tax cases historically come from ordinary civilian IRS audits. The IRS auditor sees something that he thinks is fishy and invites the criminals to go and look at the IRS. This is called a reference, and you do not know if it happens. In fact, you usually do not know until it is too late. If you forgot to report your crypto profits over the past year, you need to reconsider. Do not wait until the IRS finds you, even if you did not receive one of the 10,000 IRS crypto warning letters.
Taxpayers may think they will not be caught, but the risks are increasing – and the best way to avoid fines is to disclose and report on them as accurately as possible. IRS commissioner Chuck Rettig has even decided to step up criminal investigations, so be careful out there.
The views, thoughts and opinions expressed here are the author’s own and do not necessarily reflect the views and opinions of Cointelegraph.
This article is for general information purposes only and is not intended as legal advice.
Robert W. Wood is a tax attorney representing clients worldwide from the Wood LLP office in San Francisco, where he is a managing partner. He is the author of numerous tax books and regularly writes about taxes for Forbes, tax notes and other publications.