By Brian Ravencraft
You may have noticed that the IRS has been asking taxpayers if they had any transactions related to cryptocurrency, or virtual currency in recent years. On the first page of the 2020 IRS Form 1040, the IRS specifically asks “[a]t anytime during 2020, did you receive, sell, send, exchange, or otherwise acquire financial interest in any virtual currency?” Regardless of how you feel about whether this is an unwarranted intrusion into your private financial matters, the fact is that they want to know. To take it a step further, according to CNBC, they may already know as the IRS has issued summons to cryptocurrency exchange operators like Kraken, Circle and Coinbase to find out who has been engaged in cryptocurrency transactions.
It is important to know how the IRS views cryptocurrency. From their prospective, they view it as property that would be treated like purchasing a security. If you understand that purchasing or selling units of Bitcoin in the IRS’ view is much like purchasing or selling shares of Microsoft, Ford, or JPMorgan Chase, you have a basic understanding of the reporting they expect on your tax returns.
One major difference between the selling and purchasing of cryptocurrency and securities is that when you sell a security, your broker will issue you a 1099-B that reports the following information: date sold, date acquired, quantity, proceeds and cost basis.
When an accountant receives a 1099-B from a client, the figures are plugged into tax software to calculate gains or losses as well as to determine if they are short-term or long-term in nature. When you sell cryptocurrency, no 1099-B will be issued by cryptocurrency exchange operators. Therefore, it will be up to you to provide the IRS with the same information that is issued on a 1099-B when you sell your units of cryptocurrency. Record keeping is the most important thing you can do. It is important for you to be proactive in doing this throughout the year. For each virtual currency account that you have, you need to make sure you have a total transaction history in chronological order for all years showing all the types (Bitcoin, Etherium, etc.), units, dates, and dollar amounts of all purchases, sales, and exchanges of your cryptocurrency transactions. If the number of transactions you have are so great that it is appears to be overwhelming, especially when trying to calculate Cost Basis, don’t panic. Accountants are trained to help people sort through those transactions and establish all elements that would be otherwise reported on a 1099-B. The key is to reach out to your tax accountant on a regular basis to update them on your activity in this space. As always, I am here to answer any questions you may have.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.agribusinessaccounting.com or www.HolbrookManter.com.