IRS Targets Crypto Holders Who Evade Taxes: What to Note :
The IRS (Internal Revenue Service) is going after crypto owners who fail to report profits on their taxes.
This development comes after the court order on thursday, enjoining an NYC bank to turn over records on potential crypto tax dodgers.
While the current crypto market appears to be in shambles against buys made last November to date, half of the bitcoin holders are still holding at a profit.
However, the IRS requires US taxpayers who sell bitcoin or any cryptocurrency at a profit to report it.
And it is ready to strictly enforce compliance.
The government seized $3.5 billion in crypto last year alone.
Incase you don’t understand how to report your Crypto gains or how to pay US income taxes on crypto capital gains, read below.
How Cryptocurrency is Considered a Property by the IRS
The IRS considers cryptocurrency as a property for tax purposes.
This is because Capital gains increases income while losses decreases income.
For instance, when you purchase cryptocurrency, you have exchanged cash for a digital property, and this does not need to be reported to the IRS.
But, Once a US taxpayer sells cryptocurrency, however, the US tax code requires them to report their capital gains or losses on their income statement.
Now how to you accurately account for Crypto sales?
How to Account for Crypto Sales Properly: FIFO, LIFO, HIFO
The IRS lets taxpayers to choose their own accounting method that pleases them in calculating capital gains or losses.
When accounting, cryptocurrency investors can use the FIFO, LIFO, or HIFO method.
- FIFO : First in, First Out
- LIFO: Last in, First out
- Highest in, First out.
To determine whether a sale resulted in a gain or loss, you have to do the following;
- Establish the cost basis. These methods are all valid for finding the cost basis.
- Follow a consistent accounting pattern within each income tax reporting year. For instance, it you use the FIFO method, you have to continue with it for the rest of the year.
- Meanwhile, Taxpayers can change their cost basis method from year to year.
Is there a No Section 1031 ‘like kind’ Exemption for Cryptocurrencies?
There is no IRS Code Section 1031 like kind exchange exemption for crypto.
This has long been a cause of interest for the cryptocurrency community because 1031 allows tax deferment for like-kind exchanges.
For example, if an investor buys a house and rents it out for income purposes, and now sells the house three years later and buys two houses, they pay no additional taxes on the capital gains from the sale, since he made like-kind exchanges.
But the IRS clarified in 2019 that the exemption does not apply to crypto.
Therefore, even if you trade BTC for ETH, it doesn’t defer tax obligations on any capital gains.