The use of virtual currencies has become more and more widespread in recent years, especially in the Silicon Valley area. Many people and businesses invest in and trade cryptocurrencies and use them to make purchases or pay employees. As financial activity in this area continues to increase, the IRS has taken note, and it is taking steps to make sure taxpayers properly report these transactions and pay applicable taxes on the income they earn and the gains of their investments. Some recent developments have shown that those who own virtual currencies will want to make sure they are meeting the requirements under the tax laws.
IRS Clarifies Reporting Requirements for Virtual Currency
Those who have begun to file their tax returns for 2020 may have noticed that a new question has been added to Form 1040 asking “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This indicates that the IRS will be monitoring these transactions and taking action to collect taxes that are owed. However, taxpayers have faced some uncertainty about exactly what types of transactions need to be reported. Recently, the IRS offered some clarification by stating that those who purchased cryptocurrencies using “real” currencies do not need to answer “yes” to this question.
For other types of transactions, virtual currencies are treated as property. When selling or exchanging cryptocurrencies, a taxpayer will need to recognize any capital gains or losses based on their basis in the cryptocurrency (the amount paid to acquire it, including fees or commissions) and the amount they received in exchange for the virtual currency. Those who receive cryptocurrency as wages or as payment for services must treat the virtual currency as income based on its fair market value at the time it was received.
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