The IRS is hunting cryptocurrency holders who fail to report their tax earnings. The US Internal Revenue Service on Thursday obtained a court order urging the City of New York bank to turn over the records of potential crypto tax evaders.
While the cryptocurrency markets are “winter” against the purchases made last November, half of the bitcoin holders are making a profit. The IRS requires US taxpayers who sell bitcoin or other cryptocurrencies at a profit to report it. It is willing to use any means available to enforce compliance.
The government seized $3.5 billion in cryptocurrencies last year alone.
Here are three things to know about filing and paying US income tax on cryptocurrency capital gains.
Cryptocurrency is considered property by the IRS
The Swedish Tax Agency considers cryptocurrency to be the property of tax purposes. A capital gain or capital loss applies as if the gain were additional income (while the losses reduce the reported income).
This means that when you buy cryptocurrency, you exchange money for property. It does not lead to a notification requirement with the IRS.
When a US taxpayer sells cryptocurrency, the US tax code requires them to report their capital gains or losses on their income statement.
How to correctly calculate crypto sales: FIFO, LIFO, HIFO
The IRS allows taxpayers to choose their own accounting method for calculating capital gains or losses. When accounting, cryptocurrency investors can use the FIFO, LIFO or HIFO method.
These stand for First in, First Out; last in first out; And first in, first out. To determine whether the sale resulted in a loss or a profit, you must first determine the cost basis. These methods are all valid for finding the cost basis.
The only requirement is to follow a consistent accounting pattern in each income tax accounting year. However, taxpayers can change the way costs are calculated from year to year.
There is no Section 1031 “similar” exemption for cryptocurrency
There is no exception to IRS Code Section 1031 as a type of cryptocurrency exchange. This has long been a cause for interest in the crypto community as 1031 allows tax deferrals for similar exchanges.
For example, if an investor buys a house and rents it for income, then sells the house after three years and buys two houses, he will not pay any capital gains tax from the sale.
But the IRS clarified in 2019 that the exemption does not apply to cryptocurrencies. So trading BTC for ETH, for example, does not defer tax liability on any capital gains.
IRS post goes to tax-skipping crypto holders: 3 things to know first appeared on CryptoPotato.