The IRS is Focused on Cryptocurrency

Cryptocurrencies have become widely accepted. Bitcoin is used to purchase far more than you might expect. Google "What can I buy with bitcoin? To find out. There will be about 880,000 hits, because you can almost purchase anything with virtual currency.


However, there are federal income tax ramifications to using cryptocurrency that may surprise you.


Cryptocurrencies are a prevalent issue for the IRS. Bitcoin and other cryptocurrencies have become more widely accepted as forms of payment, and the taxing authority wants to cash in on it as well, making it a prevalent issue.


The 2020 Form 1040 (the form you recently filed or will soon file) asks if you received, sold, sent, swapped, or otherwise acquired any financial interest in any virtual currency at any point during the year. If you did, you must select the "Yes" option.


The IRS is rampant about enforcing compliance with the applicable tax rules, as evidenced by the fact that this question is on page 1 of Form 1040, directly below the lines for providing taxpayer information such as your name and address. Just a heads up!


Virtual currency transactions for which you should check the "Yes" box, according to the 2020 Form 1040 guidelines, include but are not limited to:

1.  Receiving or transfer of cryptocurrency without paying
2. the conversion of virtual currency into tangible products or intangible services,
3. trade of virtual currency for physical assets, and
4. the acquisition and trading of cryptocurrency, and
5. a liquidated financial stake in a virtual currency.

To determine how much tax you will from a cryptocurrency transaction is to compute the cryptocurrency's fair market value (FMV), measured in US dollars, on the day you get it, and the date you use it to pay anything. 



You must register taxable gain or loss when you trade bitcoin for other property, such as US dollars, another cryptocurrency, services, or anything else, just as you would when selling stock in your brokerage account that is subject to tax.

• If the FMV of what you receive surpasses your basis in the virtual currency you swapped, you'll have a taxed gain.
• If the FMV of what you acquired is less than your virtual currency basis, you'll have a taxed loss.

You must register taxable gain or loss when you trade bitcoin for other property, such as US dollars, another cryptocurrency, services, or anything else, just as you would when selling stock in your brokerage account that is subject to tax.

Based on how long you had the cryptocurrency before using it in a transaction, the taxable gain or loss from exchanging will be a short or long-term capital gain or loss.

Suppose you spend one bitcoin on tax-deductible materials for your business. Bitcoins are worth $61,000 each on the day of acquisition. So you have a $61,000 business deduction. 

However, another aspect of this transaction is the tax gain or loss from keeping bitcoin and then using it.

Suppose you purchased that bitcoin for $31,000 in May of the current year, then you would have realized a gain of $30,000. Since you did not hold the bitcoin for more than a year, the 30,000 gain is a short-term capital gain. 

Detailed records are essential for compliance. It would be best if you keep the following documents:

• the date you obtained the crypto, 
• its FMV on that day of,
• the FMV on the date you swapped it for anything
• the cryptocurrency trading exchange you used to determine FMV, and
• your reason for acquiring the cryptocurrency 

If you have questions concerning cryptocurrency, don't hesitate to contact us.