The Internal Revenue Service (IRS) sent a message last year when it sent out 10,000 letters to those who own cryptocurrency. The letters provided information on how to come into compliance with tax laws for this asset. Although the directions may have been confusing, the message was clear. The IRS knows who has cryptocurrency and it expects taxpayers to report the asset.
What does the IRS expect?
The agency expects taxpayers to account for these assets in their tax returns. To determine the value of the asset for tax reporting purposes, the agency generally expects the taxpayer to report the fair market value at the time of receipt of the cryptocurrency.
Reporting can be more complex for those who mine cryptocurrency. In these instances, taxpayers may use the first-in-first-out method to determine the estimated fair market gain or loss. A log of these transactions can help the taxpayer determine the right amount to use for tax compliance and also serve as evidence to support the taxpayer’s decision in the event of an audit.
Why should taxpayers with cryptocurrency act to ensure tax compliance?
The letters noted above were just the beginning. The IRS also included a question on 2019s Tax Form 1040 asking taxpayers whether or not they “sold, sent, exchanged, or otherwise acquired any financial interest in cryptocurrency.” This appears to serve as another step towards increased federal compliance efforts when it comes to cryptocurrency reporting expectations.
What’s the worst that could happen?
Taxpayers may believe the worst they could face is a financial penalty. In reality, if the IRS can establish the failure to comply with tax law was intentional, the taxpayer could face criminal penalties potentially including jail time. And, as noted in a recent piece in Forbes, the mere failure to check a box on a tax form like the one noted above may be enough to constitute willfulness.
Those who have questions about tax compliance are wise to seek legal counsel. The attorneys at Goldburd McCone are familiar with these issues and can discuss your options.