The IRS is going after crypto owners who fail to report gains on their taxes. The US tax authority got a court order Thursday enjoining an NYC bank to turn over records on potential crypto tax dodgers.
While crypto markets appear in the throes of “winter” against buys made last November to date, half of the bitcoin holders are holding at a profit. The IRS requires US taxpayers who sell bitcoin or any cryptocurrency at a profit to report it. And it is willing to use all means available to enforce compliance.
The government seized $3.5 billion in crypto last year alone.
Here are three things to know about filing and paying US income taxes on cryptocurrency capital gains.
Cryptocurrency is Considered Property by the IRS
The Internal Revenue Service considers cryptocurrency to be property for tax purposes. Capital gains or losses apply as if gains are additional income (while losses decrease income reported).
That means when you buy cryptocurrency, you have exchanged cash for property. That does not trigger a reporting requirement with the IRS.
Once a US taxpayer sells cryptocurrency, however, the US tax code requires them to report their capital gains or losses on their income statement.
How to Account for Crypto Sales Properly: FIFO, LIFO, HIFO
The IRS allows taxpayers to choose their own accounting method to calculate capital gains or losses. When accounting, cryptocurrency investors can use the FIFO, LIFO, or HIFO method.
These stand for First in, First Out; Last in, First Out; and Highest in, First Out. To determine whether a sale resulted in a loss or gain, you must first establish the cost basis. These methods are all valid for finding the cost basis.
The only requirement is to follow a consistent accounting pattern within each income tax reporting year. Taxpayers can change their cost basis method from year to year, though.
No Section 1031 ‘like kind’ Exemption for Cryptocurrencies
There is no IRS Code Section 1031 like kind exchange exemption for crypto. This has long been a cause of interest for the cryptocurrency community because 1031 allows tax deferment for like-kind exchanges.
For example, if an investor buys a house and rents it out for income, then sells the house three years later and buys two houses, they pay no taxes on the capital gains from the sale.
But the IRS clarified in 2019 that the exemption does not apply to crypto. So trading BTC for ETH, for example, does not defer tax obligations on any capital gains.