Cryptocurrency and taxation may not be a match made in heaven, but taxation seems inevitable, and the Internal Revenue Service (IRS) has made it clear that it will hunt down those who do not report.with IRS subpoena For Coinbase, Kraken, Circle and Poloniex and other law enforcement work, the IRS is pursuing them.this The IRS sent 10,000 letters There are different versions that require compliance, but all versions are designed to encourage taxpayers to comply with the regulations.
The IRS’s hunt for cryptocurrencies is often compared to the IRS’s hunt for foreign accounts more than a decade ago. Unfortunately, it is not yet clear whether there will be an encrypted amnesty program that simulates the offshore voluntary disclosure program developed by the IRS for offshore accounts.
The U.S. Internal Revenue Service makes its first major announcement regarding cryptocurrencies Announcement 2014-21, Classify it as a property. This will have huge tax consequences and will be exacerbated by sharp price fluctuations. The sale of cryptocurrency may cause gains or losses and is subject to taxation. But even using cryptocurrency to buy things can also trigger taxes. The same goes for paying employees or contractors. Even the use of cryptocurrency to pay taxes will also trigger more taxes.
We have seen Crypto audit by the IRS, And some states (especially the Franchise Tax Commission in California), and will certainly follow more. At least for now, there are alternatives for tracking and tax declaration preparation that can make the process easier than earlier. Everyone is trying to minimize taxable crypto gains and defer taxation if it is legal.
Nonetheless, it is easy to get confused about tax treatment and take a tax stance that may be difficult to defend if you get caught. With this in mind, here are some of the things I heard, which I call the crypto tax myth.
Unless you receive an IRS 1099 form, you cannot owe any taxes on cryptocurrency transactions. If you have not received the 1099 form, you can check the box on the tax return to indicate that you have not made any transactions with cryptocurrency.
Actually: Even if the payer or broker does not submit the 1099 form, it is still possible to owe taxes. Form 1099 does not generate tax if there is no tax payable before, and a large amount of taxable income is not reported on Form 1099. Form 1099 may be wrong in this case, please explain on your tax return. However, if you have been audited and your best defense is that you chose not to report your transaction because you did not receive the 1099 form, that would be too weak.
If you hold cryptocurrency through a private wallet instead of an exchange, you do not need to report the cryptocurrency on your tax return.
Actually: The tax rules are the same for private wallets or exchanges. The urge to hide ownership by transferring wealth to an anonymous holding structure is not new. When Swiss banks began disclosing their American account holders to the IRS and the U.S. Department of Justice, many U.S. taxpayers tried almost every method, but almost everyone eventually paid the money and usually received a hefty fine. The cryptocurrency issues on the IRS 1040 form are not limited to cryptocurrencies held through exchanges. If you say “no,” even if you hold cryptocurrency through a private wallet, you may make false statements on tax returns signed under the penalty of perjury. You may bet that you will never get caught, but thousands of American taxpayers with Swiss bank accounts can attest to how bad this bet turns out.
If you hold your cryptocurrency through a trust, LLC, or other entity, you do not need to tax or report cryptocurrency transactions. In addition (and the myth continues), income generated through a limited liability company is tax-free.
Actually: Owning cryptocurrency through an entity may keep income away from your tax return. However, unless the entity is qualified (and registered) as a tax-exempt entity, the entity itself may have tax reporting obligations and may owe taxes. For tax purposes, a limited liability company is taxed as a company or partnership, depending on its facts and tax options. Single-member limited liability companies are ignored, so the income of the limited liability company ultimately depends on the return of the sole owner. If your entity is a foreign entity, there are complex U.S. tax rules that can make you directly liable for certain income generated within the foreign entity.
If I structure the sale of my cryptocurrency as a loan (or some other non-sale transaction), I don’t have to report earnings.
Actually: Consider whether you are lending or selling cryptocurrency. The IRS and courts have strong principles to ignore false transactions. Did you get the same cryptocurrency that you lent? Do you charge interest on loans and pay taxes when you receive the interest? Some loans may not be established. Moreover, if you sell cryptocurrency and receive promissory notes, the calculation of installment sales may further complicate your taxes.
A cryptocurrency exchange is a kind of trust, because you cannot unilaterally change the exchange’s policy. Therefore, for tax purposes, you will not have cryptocurrency in your account and you will not have to report transactions through an exchange.
Actually: The Internal Revenue Service did not say any of these. The IRS guidelines indicate that the IRS treats taxpayers as possessing cryptocurrencies held through their trading accounts. It seems unlikely that the IRS will treat cryptocurrency held through an exchange account as owned by the exchange itself (as a trustee) rather than by the account holder. Taxpayers usually own assets through accounts held by institutions, such as bank accounts, investment accounts, 401(k), IRAs, etc.
In most cases, tax laws treat taxpayers as having funds and assets held through these accounts. Some special accounts such as 401(k)s and IRAs have special tax rules. Treating an account as a trust is not necessarily a good tax result. The beneficiaries of trusts, especially foreign trusts, have heavy reporting obligations. Therefore, before you consider a crypto exchange as a trust, please pay attention to your wishes. Calling something a trust does not mean that income generated in the trust is exempt from income tax.
Congress’s amendment to Section 1031 of the Tax Code restricts similar transactions in real estate, but does not tax cryptocurrency transactions.
Actually: Article 1001 of the Tax Law stipulates that taxable income comes from the “sale or other disposal of property”. The sale of any type of property for cash or other property can generate taxable income. The US Internal Revenue Service says that encryption is property, so trading other encryption with encryption is selling encryption at the value of the new encryption.
Before the amendment to Article 1031 takes effect in 2018, the exchange of cryptocurrency for cryptocurrency may be a similar exchange under the provisions of Article 1031.However, the IRS is opposing this position in a tax audit and has issued guidance Rejection of tax exemption for certain cryptocurrency swapsThis is not a precedent, nor does it cover the waterfront, but it tells you what the IRS thinks. In any case, since Article 1031 restricts the treatment of similar exchanges of real property, the exchange of cryptocurrency for cryptocurrency is taxable unless they qualify for another exception.
Every taxpayer has the right to plan their affairs and transactions to minimize taxation. But they should be wary of quick fixes and theories that sound too good to be true. The US Internal Revenue Service seems to believe that many crypto taxpayers have not complied with the tax law, and that they need to be careful in the future. It is worth considering doing some clean-up work for the past. Be careful outside.
This article is for general reference only, and should not and should not be regarded as legal advice.
The views, thoughts, and opinions expressed here are only those of the author, 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 and serves as a managing partner in the San Francisco office of Wood LLP. He is the author of numerous tax books and frequently writes articles on taxation for Forbes, Tax Notes, and other publications.