Subpoenas Issued To Crypto Exchanges
Over the past few years, the IRS has issued subpoenas to several crypto exchanges ordering them to disclose some user accounts. For example, in 2018, Coinbase had to disclose approximately 13,000 user accounts including taxpayer identification number, name, birth date, address, records of account activity, transaction logs and all periodic statements of account or invoices pursuant to John Doe summons. On another occasion, the IRS subpoenaed Bitstamp to release more information about a taxpayer who filed an amended return and requested a $15,475 refund.
How The Irs Knows You Owe Crypto Taxes
WASHINGTON, DC – APRIL 15: The Internal Revenue Service building stands on April 15, 2019 in … Washington, DC. April 15 is the deadline in the United States for residents to file their income tax returns.
As another tax season arrives, one of the major questions crypto holders have is how does the IRS know if someone has cryptocurrencies. Before I describe the ways that the IRS knows about your crypto holdings, note that the US tax system relies on a voluntary compliance system. This means that the the IRS expects you to report all taxable transactions in a given year because it is required by the internal revenue code. Failure to do so may carry hefty penalties. While keeping that thought in mind, lets dive into 3 ways the IRS may find out about your crypto holdings.
But You Said That 1099
1099-K is an extremely misleading form that cryptocurrency exchanges are sending out to cover their bases from a regulatory and liability standpoint. The unfortunate thing is that 1099-K provides no information on your gains and losses .
Still confused? No problem. Our team here at CryptoTrader.Tax has been working with crypto taxes for a long time. We are happy to answer any of your tax related questions. Just send us a chat through the live chat widget on our homepage.
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The Tax Implications Of Cryptocurrency
As we have discussed in great detail in our Complete Guide to Cryptocurrency Taxes, cryptocurrency is treated as property for tax purposes. This means that capital gains and losses reporting rules apply to cryptocurrency similar to how they apply to stocks .
For example, if you bought 0.1 BTC for $1,000 and then sold it two months later for $2,000, you have a $1,000 capital gain. This gain is a form of income. You report this gain on your tax return, and depending on what tax bracket you fall under, you pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain. This applies for all cryptocurrencies.
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Has The Irs Released Any Guidelines About Cryptocurrency Tax
Yes, the IRS maintains a Virtual Currency Issues Team and yes, said team has produced some guidelines about cryptocurrency tax issues.
- Rev. Rul 2019-24 is recently published IRS guidance that discusses the taxation of hardforks and airdrops.
- The IRS also released frequently asked questions on virtual currency transactions, including topics like determining cost basis, making or receiving crypto payments, and inventory methods.
- Notice 2014-21 is an IRS guide that covers various crypto legalities, including paying employees with virtual funds and the agencys take on certain types of token trades.
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Us Crypto Exchanges Have No Standards For Reporting To The Irs
This is the big problem with crypto trading because there are still no standards for reporting defined by the IRS, causing US crypto exchanges like Coinbase to stop issuing the 1099-Ks.
A continued lack of reporting standards will create an unfortunate situation where taxpayers and tax preparers will not easily understand how to report their crypto activity to the IRS.
What Is Virtual Currency
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like real currency , but it does not have legal tender status in the U.S. Cryptocurrency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as convertible virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.
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Does Binance Report To The Irs
Anyone who has part of their savings or investment portfolio in cryptocurrency needs to understand about the workings of Binance, the international crypto exchange. Binance is a huge platform.
In fact, its the biggest in the world as of 2018 when measured by aggregate trading volume. Currently, people who use Binance can do business in more than 100 different types of cryptocurrencies.
For U.S. citizens who use Binance, the big question is Does Binance report to the IRS? In addition to that topic, many investors wonder about the general tax guidelines for cryptocurrency holders, particularly as those rules pertain to paying the legal amount of tax on trading profits in the crypto marketplace.
Does Binance Report to IRS?
The short answer to the question, Does Binance report to the IRS? is no, Binance does not report to IRS. However, U.S. taxpayers are required by law to report certain kinds of holdings in foreign-based banks and financial institutions.
Binance clearly meets the IRS definition of a financial institution, thus taxpayers are legally bound to report holdings to the IRS each year.
How does the process work? First, you need to determine whether you meet the dollar-amount threshold. Generally speaking, if your aggregate account value, in cryptocurrencies, was $10,000 or greater, you must report to the IRS. Note the following:
-The $10,000 rule pertains to account value of cryptocurrency, that is, the amount of cryptocurrency you hold in the account.
Us Crypto Traders Need A 1099
Crypto Traders need a hypothetical 1099-CRYPTO designed for reporting crypto activity because the US crypto exchange has to know how much was paid for the stock, as well as what it was sold for, and you need a closed system for that.
A lot of millennials who own cryptos do not know how to report their taxes and are falling into the non-compliance for not reporting their cryptos.
Theyre filing false tax returns because they know they dont have a better tool to do it.
A hypothetical 1099-CRYPTO is years away, but the idea is that the 1099-CRYPTO could be like a 1099 B for crypto traders that would state what you bought it for and traded it for and what the dollar value was.
No single exchange has that type of information because people bought on exchange one, and they sold an exchange two. And exchange two has no idea what you bought it for.
I expect this will be a continuing headache for the IRS.
As of now, the IRS has not provided any guidance on how theyre going to fix it.
Suppose you are a millennial who has fallen out of compliance with the IRS for the IRSs lack of clarity for reporting your crypto.
My advice to you is to get compliant this year and file a crypto tax return with integrity. From there, your best defense against an IRS audit is becoming a member of CryptoTaxAudit.
Become a member today. Weve got your back!
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Consider Working With A Professional
Even if you arent conducting complex crypto activities, and just have questions about your specific tax obligation or youre unsure if youre reporting correctly, consider working with a tax professional who has experience interpreting tax code related to virtual currencies.
The IRS and other regulators cannot issue guidance on every situation a taxpayer may run into, and there are plenty of gaps in current guidance. Thats why its important to look for a tax professional familiar with current IRS guidance and has experience reporting cryptocurrency gains and losses, Chandrasekera says. Ask potential tax pros if they own any virtual currency themselves, and make sure they acknowledge the uncertainties in the tax code.
There are some gray areas, and thats where CPAs need to come in and say, OK, we dont have direct guidance from the IRS, but when they set up the guidance, this was the intention, Chandrasekera says. As CPAs, we should be able to use our experience and our overall knowledge about the tax code and apply those rules to the unique cases that we see.
Short Term Capital Gains Tax Events
Short term capital gains apply for any crypto that was held for less than 12 months.
For example, if you bought Ethereum for $400 and sold it 5 months later for $600, your $200 gain would be a short term capital gain.
Short term capital gains donât get any special tax treatment. They are simply treated as income on your taxes , and thus you pay taxes on your short term capital gains according to your personal income tax bracket .
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What Happens If You Dont Report Your Gains/losses
As mentioned earlier, it is important to report your income and other activities and pay taxes for the benefit of the country and be compliant with the regulations. In such a case, if you forget to report certain trading, investment, earning activity on your taxes, the IRS or the taxman of the corresponding country will get back to you on missing information.
They can get back to you because there are various streams of information that flows to taxman against each Tax Identification Number . This forgetfulness will cost you if you voluntarily or involuntarily missed reporting your activity. It could result in penalties, interest payments on the missing revenue for the IRS, and sometimes even worse for non-compliance depending on the severity of your mistake and the intention behind it. So, it is important to comply with the tax laws and report your gain/loss in general as well as on cryptocurrency trading/investments/activities.
What If You Forgot To Report Your Crypto Taxes
If youâre like many other crypto investors, thereâs a strong chance that you werenât always aware of the fact that your crypto-related income needed to be reported on your taxes.
If you are in this situation, donât stress out. You can amend a prior year’s tax return to include your crypto-related income with IRS Form 1040X.
Many cryptocurrency investors go through this process without issue, and itâs always better to amend your return in good faith rather than waiting for the IRS to find you.
For a detailed guide, checkout our blog post on how to amend your tax return to include your crypto.
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Do I Have To Report Cryptocurrency Losses To The Irs
Yes, you need to report your crypto losses to the IRSand doing so could actually save you a pretty penny, for two reasons.
One: Your exchange may be sending information about your transactions to the IRS, but that information is often incomplete and doesnt include any losses. This can make the IRS think you owe much more than you actually do. Correcting that mistake can be more expensive and troublesome than reporting properly to begin with.
Two: Capital losses offset capital gains, lowering the amount of tax owed. They can also be used to offset regular income and other capital gains , and can even be carried forward to offset future gains! Give us a call to learn more.
How Are Hard Forks Taxed
If a certain cryptocurrency that you are holding goes through a hard fork which âoccurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger,â the new forked cryptocurrency you receive is taxed as income.
Your cost basis in the newly received cryptocurrency becomes the income you recognize.
Megan held 2.5 Bitcoin in July of 2017 and received 2.5 Bitcoin Cash as a result of the bitcoin cash hard fork.
Megan recognizes income at the fair market value of the bitcoin cash at the time it was received. If Bitcoin Cash was trading for $500/BCH that day, Megan would recognize income of $1,250 . Meganâs cost basis in this Bitcoin Cash becomes $1,250.
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Buying & Selling Cryptocurrency
Many folks with a disposable income would like to invest. One such investment vehicle is digital assets a.k.a cryptocurrency. They have emerged after the financial collapse in 2009 and been gaining popularity since then. Now that there are 1000+ cryptocurrencies in the market apart from the first one Bitcoin, it has become mainstream to trade them with confidence in various trusted and regulated exchanges.
What Information Has Coinbase Shared With The Irs In The Past
In the 2018 and 2019 tax years, Coinbase issued Form 1099-K to customers with at least 200 orders during the year, with the total value of those orders equal to or greater than $20,000. However, it discontinued this practice after the form led the IRS to mistakenly believe many traders had under-reported earnings.
Additionally, in December 2016, the IRS issued a summons to Coinbase, asking for records of ~500,000 Coinbase customers. These records include cryptocurrency traders’ personal information and cryptocurrency transactions.
Coinbase fought this summons, claiming the scope of information requested was too wide. After Coinbase petitioned the IRS, the order was changed to only be for a more narrow scope of information from only ~13,000 users. On 23 February, 2018, Coinbase informed these users that they were providing the following information to the IRS:
Taxpayer ID number
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Why Did I Receive The Cp2501
If you received a CP2501 notice, it is because the information reported to the IRS by third parties does not match the information you reported on your tax return. For example, if the W-2 your employer sends you at the beginning of the year does not match the information you reported to the IRS, you will likely get a CP2501 letter.
The same is true for cryptocurrency exchanges. Many cryptocurrency exchanges report their users trading activity to the IRS using Form 1099-B, Form 1099-K, or Form 1099-MISC. Unfortunately, these forms can paint a very inaccurate picture of your tax liability and make the IRS think that you owe a lot more than you actually do.
Form 1099-K only reports your total sales volume this doesnt account for any losses and can make it look like you had high capital gains even if you didnt. Watch our video for more information.
In this example, the taxpayer bought and sold about $400,000 worth of cryptocurrency on Coinbase in 2019, and Coinbase reported this information to the IRS. That doesnt mean the taxpayer has $400,000 of taxable income. However, thats what the IRS will think if the crypto transactions arent fully reported.
Whats The Purpose Of These 1099s Anyway
1099 information reporting has been around for a long time, and it doesnât come as a surprise that more and more cryptocurrency exchanges are starting to incorporate 1099 information reporting. There are exactly 20 different types of 1099âs in existence today . Each of them serve the same general purpose: to provide information to the Internal Revenue Service about certain types of income from non-employment-related sources.
Put another way, 1099âs are sent out to report on the income that you received that wasnât from an employer.
In the U.S., income is taxable. Sadly, thereâs no way around thisâ¦
The income that you earn from cryptocurrency investing is no different, and these 1099âs give both you and the IRS records of this income. If the IRS receives a 1099 detailing income that you did not report on your taxes, itâs automatically flagged.
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That Sounds Super Complicated Can You Make It Easy
Yep! Gordon Law Group is here to make your crypto tax reporting simple. All you have to do is send your transaction history through a secure API or file transfer. We work our crypto tax magic, and you get a bulletproof report for your tax return!
Whether youre filing for this year or fixing past years reports, we can help. Have lost or missing transactions? Dont worry weve helped countless clients rebuild their history to properly report.
How Does The Irs Know About Your Crypto
The IRS uses a variety of tactics to detect cryptocurrency investments and unreported income. The most predominant of which is the 1099 reporting system.
Major exchanges like Coinbase, Gemini, Uphold, Kraken, and others report certain customer activity to the IRS using form 1099-K and/or other related 1099âs. These 1099âs all serve the same general purpose: to report non-employment related income to the IRS.
Both you and the IRS get sent a copy of these forms at year-end.
If the IRS receives a 1099 from your crypto exchange but sees no cryptocurrency income reported on your taxes, your account will be flagged and an automated CP2000 letterwill be sent alerting you of your non-reported income and tax liability.
You can learn more about how 1099-K works for your crypto exchange activity here.
Outside of 1099 reporting, the IRS works with blockchain analytics companies like Chainalysis to track cryptocurrency movements directly on-chain. Since 2015, the IRS has spent more than 10 million dollars on Chainalysis contracts. They use this data to identify tax fraud and money laundering.
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