The United States Internal Revenue Service classifies cryptocurrencies as property, which means that you can trigger taxes every time you use cryptocurrencies to buy something. You may be using it to pay for a Tesla electric vehicle, oh sorry that’s not possible anymore, a cup of coffee or even a castle in Europe. You may be paying someone for services, either as an independent contractor or as an employee. But no matter what the transaction is, you may have a profit or a loss, something very different from the impact of income tax on the person you pay.
It’s not that simple with taxes
The tax impact could even be hampered by the wild fluctuations in value that tend to characterize cryptocurrency investments. Also think about paying for services: let’s say you pay someone as an independent contractor; To report the payment, you must affair them an IRS Form 1099. Whatever type or amount of crypto you use, the IRS will tell you that it paid them the current market value of the crypto that day.
When you pay an independent contractor and they issue a Form 1099, you cannot enter “1,000 Bitcoin (BTC)” on the form. You must put the value in US dollars at the time of payment. The contractor you pay could keep the crypto or could sell or transfer it the same day, but that doesn’t affect your taxes.
What about wages paid to employees? Wages paid to employees using cryptocurrencies are taxable and must be reported on a W-2 form. They are also subject to withholding and payroll taxes.
Related: Crypto Taxes, Reports and Tax Audits in 2021
However, if you pay someone in property, how do you withhold taxes? You could pay some cash and some Bitcoin and keep a lot of cash, but that can be complex and complicated. Of course, you can also choose to pay the person as a contractor. But remember, worker status issues can occur in any context, including this one.
Therefore, investing and trading in cryptocurrencies inevitably involves significant tax problems, whether you like it or not. It’s no secret that the IRS wants you to report your crypto earnings. You can also report crypto losses, but the IRS doesn’t care as much if you claim them. Income and earnings, on the other hand, are very important to the IRS. The IRS still believes that there are significant compliance issues in the crypto community, so there is continued mistrust and additional scrutiny.
Related: More IRS Citations for Cryptocurrency Exchange Account Holders
The most recent evidence of this ongoing problem is that the US Department of the Treasury hopes to publish new rules stating that companies receiving cryptocurrencies worth more than $ 10,000 would have to file a currency transaction report with the government. naming names and giving details. You may think they won’t catch you, but the risks increase. The best way to avoid penalties, or worse, is to disclose and report as accurately as possible.
Remember those 10,000 letters sent by the IRS to crypto taxpayers? And what about all the IRS subpoenas to Coinbase, Kraken, and others? The search is still going on, as the crypto question on IRS Form 1040 should indicate. The Justice Department’s Tax Division successfully argued that the mere failure to check a box related to foreign bank account reports is intentional, per se; The same argument could apply to crypto accounts.
Related: The crypto FBAR: implications beyond
Intentional misconduct carries higher penalties and a greater threat of criminal investigation. The IRS Criminal Investigation Division has met with tax authorities in other countries to share data and enforcement strategies on cryptocurrency tax evasion.
When you file your taxes, the IRS asks a simple question: “At any time during 2020, did you receive, sell, send, exchange, or acquire any financial interest in any virtual currency?” Sounds simple enough, yes or no, right? What can go wrong? It does not ask for numbers or details, although if you sold some, it should go elsewhere on your tax return. After all, since cryptocurrencies are owned by the IRS, any sale will produce a profit or loss. Many other transfers will too, including an exchange of one type of crypto for another. The last step was the announcement that the Treasury Department plans to impose new reporting requirements for cryptocurrencies.
Soon, banks and financial institutions will have to report information to the IRS. Exchanges, custodians and crypto payment services are expected to do the same. Interestingly, the government is taking pages out of its playbook from the rules surrounding cash transactions, even though the IRS said in 2014 that cryptocurrencies were property, not currency.
Cash, reports go to IRS Form 8300 for payments over $ 10,000. The IRS even has a list of Frequent questions regarding cash reporting. For many years, companies have had to report cash payments of more than $ 10,000, prompting all sorts of behavior (generally discouraged) on the part of people to try to avoid it. So-called “structuring transactions” can be a crime, even if all the cash you are trying to use is entirely yours.
So if the $ 10,000 baseline is implemented for crypto reporting, I would guess there will be people trying to keep something private and end up in trouble for trying to bypass a reporting trigger. Bank secrecy law requires financial institutions to report currency transactions over $ 10,000 to the IRS. This law also makes it a crime to structure foreign exchange transactions to avoid complaints. The IRS Division of Criminal Investigation make accomplish the rules on cash transactions.
However, a 2017 report said the law is reinforced mainly against individuals and companies whose income was obtained legally. That’s what happened to former House Speaker Dennis Hastert, who was accused about structuring your own money. Eventually, it was sentenced to 15 months in prison. Could the encryption app end the same way?
If the new crypto reporting threshold of $ 10,000 goes the same way as cash reports, some people may try to structure themselves around the reports. If they do, and if the rules are similar to the cash reporting rules, that could be quite dangerous.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
The views, thoughts, and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Robert W. Wood is a tax attorney representing clients around the world from Wood LLP’s San Francisco office, where he is a managing partner. He is the author of numerous tax books and writes frequently on taxes for Forbes, Tax Notes, and other publications.