This year was like no other. As it draws to a close and we look to 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 some to dread.
Gains and losses
It’s hard to look at crypto and 2020 without commenting on gains and losses. Bitcoin (BTC) greatly increased in price, which makes many investors happy. If you had taken short positions, you would of course be less satisfied. And if it has been invested in you XRP, the news that the US Securities and Exchange Commission is not satisfied with XRP caused some price impact in the unwanted direction. When it comes to real and perceived value and purchasing power, these developments are important. But what about taxes?
Tax Day Delay: IRS Smoother?
Tax returns for 2020 are due on April 15, 2021, which isn’t too far off. Do not count on a delay like last year. In 2020, the Internal Revenue Service gave us all one 90 days postponement of returns and payments, until July 15, 2020 (IRS Watch 2020-17). The world may still be in the throes of COVID-19 over the upcoming tax filing season, but most observers don’t expect the same leeway from the IRS when it comes to tax returns for 2020.
The same can be said for the IRS which is easing many of its enforcement activities. In early 2020, IRS commissioner Chuck Rettig announced the “People First Initiative”. Do you have to pay your taxes in installments? The IRS will help because it has a worn-out process for working out installment payments. In addition, payments due between April 1 and July 15, 2020 were suspended, along with tax duties and levies. Even new passport debt certificates when tax arrears exceeded $ 50,000 were suspended, and most of the new tax controls were also suspended.
What about now in early 2021? Many IRS employees still work remotely for the most part, but don’t assume that means getting some leeway in early or mid-2021 that taxpayers got in 2020. It is highly unlikely. How about arguing with the IRS or in court that you don’t have to pay IRS fines because you were adversely affected by the pandemic? You can try, but the IRS commissioner has already pushed hard on suggestions that the IRS should have a special pandemic allowance for penalties. Again, don’t count on it.
IRS forms for crypto taxes
Two years ago, crypto’s IRS went through some sort of tax issue for everyone add a question to everyone’s tax return, and has the same happened with the tax returns for 2020. It means that from the 2019 tax returns filed in 2020, the IRS will ask you a simple question:
“At any time during 2019, did you receive, sell, send, barter or otherwise acquire financial interests in a virtual currency?”
It’s pretty simple: just yes or no; it doesn’t ask for numbers or details, although that would be elsewhere on your tax return.
This addition for 2019 returns will be continued for the 2020 returns that you submit in 2021. In fact, you should assume that this will be included in the tax return as standard from now on. Because the IRS classifies crypto as property, every sale will yield a profit or a loss, and a yes or no box can turn out to be quite important. In fact, given the IRS’s track record with offshore bank accounts, this can lead to severe penalties or even jail time.
The tax department of the Justice Department has successfully argued that simply unchecking a box related to reporting to foreign accounts is intentional. Deliberate failure is associated with higher penalties and a greater threat of criminal investigation. The IRS’s Criminal Investigation Division is even meeting with tax authorities from other countries to share data and enforcement strategies to track down potential cryptocurrency tax evasion. This seems to be reminiscent of the foreign bank account that is drawn on Schedule B.
If a taxpayer answers “No” and is subsequently discovered to have transacted with cryptocurrency during the year, the fact that he explicitly answered No to this new question (under pain of perjury) could be used against him. What if you just have some sort of ‘signature power’ over crypto owned by your non-computerized parents or other family members? That way you can help them manage their crypto.
If you are selling a parent’s cryptocurrency on their behalf, at their request and / or for their benefit, should you answer “Yes” or “No” to the question? Various escrow and trust arrangements – some informal, some not – have flourished. They can be sensitive, especially now that the IRS has a lot more access to information. But be careful who is selling and how such activities are reported.
Do you need to attach an explanation to the declaration explaining your relationship with the digital currency? There are probably no perfect answers to this question, but what is clear is that it is a big mistake to answer “No” when the truth is “Yes”. Skipping the boxes altogether might not be that bad, but it’s also no good if the truth is “Yes”. If the truth is “Yes,” say so, and don’t forget to disclose and report your income, gains, losses, etc.. Maybe that’s the point of the question: to be a prominent memory.
Other tax forms
Don’t think that your tax return is the only tax form you see. While crypto still escapes some reporting forms, that’s much less true today than it once was. What about IRS forms 1099-MISC, 1099-K, 1099-B or Schedule K-1? There is even the new Form 1099-NEC for the 2020 declaration season.
All of these forms can report crypto payments and transactions. These forms arrive at the end of January for reporting payments or transactions made in the previous calendar year. Wages paid to employees in digital currency must be reported on one Form W-2 and are subject to federal withholding and payroll taxes.
Wages paid in digital currency to independent contractors are taxable to them and payers doing business must spend them Form 1099-NEC. A payment with a digital currency is subjects to Report Form 1099, just like any other real estate payment. That means if a person in the corporate sector pays crypto worth $ 600 or more to an independent contractor for services, a Form 1099 is required.
If you receive Form 1099, keep an eye out for it. Each is reported to the IRS (and the state tax authority). If you don’t list or otherwise address the reported income on your tax return, you can expect the IRS to follow up.
Transactions lead to taxes
In 2014, the IRS announced that crypto is owned. If you have 100 BTC and you sell 10, which 10 have you sold? There is no perfect answer to this question. Most of the tax law takes into account shares of stocks, not cryptocurrency. Specific identification of what you are selling, when you bought it, and what purchase price is likely to be the cleanest. But that may not be possible. Some people use an averaging convention, where you essentially average your costs for a number of purchases. Consistency and administration are important.
IRS audits and access to information
Theirs uses software to keep track of crypto and has also accessed records from other sources. Besides, with the issuance of Forms 1099 and K-1, many reports are now being dropped in the fold of the IRS. That should give birth to the taxpayer.
The IRS now has crypto training for its auditors and detective agents. Should the latter scare you? I think so. The IRS and the Department of Justice continue to bring criminal charges, primarily using cryptocurrencies for illegal purposes related to other crimes, such as money laundering or child pornography. But that is not a guarantee.
By the way, historically most criminal tax cases come from regular old civil IRS audits. The IRS auditor sees something he thinks is wrong and invites the criminals to come and see the IRS. It’s called a referral and you don’t know if it’s happening. In fact, you usually don’t know until it’s too late. If you forget to report your crypto gains over the years, reconsider. Don’t wait for the IRS to find you, even if you haven’t received one of those 10,000 IRS crypto warning letters.
Taxpayers may think they won’t get caught, but the risks are mounting – and the best way to avoid fines is to disclose and report as accurately as possible. IRS Commissioner Chuck Rettig has even moved on to more criminal investigations, so be careful out there.
The views, thoughts and opinions expressed here are the sole ones of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article is for general information purposes and is not intended and should not be construed as legal advice.
Robert W. Wood is a tax advisor who represents clients worldwide from Wood LLP’s San Francisco office, 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.