PSA - Crypto Tax Alert - The IRS is Gearing Up - How the Non-Compliant AMEND
July 15, 2019
Last week, Coindesk.com reported that the United States IRS will be pursuing tech companies to dig up information on non-compliant cryptocurrency users.
The details of the the IRS methodology has been outlined in a slide deck that has been leaked on Google drive (linked in the Coindesk article).
For a United States citizen who has not reported their cryptocurrency taxes, there is still time.
Amended Return - General
An individual can amend his/her tax return using IRS Form 1040x. If his/her original tax return was filed through an electronic tax software, it actually could be a pretty quick process (of course depending on the complexity of the individual's situation).
A 1040X is designed to permit a taxpayer to make corrections to income, deductions, tax withholding or credits versus the tax return that was originally filed in error. A common example is if a taxpayer filed by April 15th but forgets a 1099 or some other nonreported income, he/she can file the amendment to pay the additional tax. The taxpayer generally has 3 years to amend the tax return to pay the additional tax (which is how far back the IRS can typically pursue for collection). In the case of a gross omission of income, the IRS can assess tax further back than 3 years.
Amended returns also can be filed when a taxpayer has overstated their tax liability on the originally filed return - it is not all bad!
Cryptocurrency capital gains
A taxpayer looking to amend their return can obtain cryptocurrency tracking software, link up exchange data, and quickly compute capital gains/losses and mining/Steem income.
- Here is a cryptocurrency tracking software that I have used that can be helpful for aggregating transactions from various exchanges, Steem, and other mining/staking sources. https://cointracking.info/?ref=C16086
- The steemdb.com website allows for quickly copying/pasting reward data into excel to import into CoinTracking (and presumably other software that would accept imports). Here is an example of my page, anyone can look up their Steem account: https://steemdb.com/@cryptotax/authoring
- For an individual whose crypto transactions are limited to Coinbase transactions, he/she may be able to use the tax report that they provide with some degree of comfort. https://steemit.com/bitcoin/@cryptotax/peer-review-of-coinbase-s-tax-report
After calculating cryptocurrency transaction gains/losses, capital gains/losses can be reported on Form 8949 and Schedule D:
(1)Note on Steem/Mining: Income from Steem/Effective Steem (SP)/SBD or Mining is ordinary income, the subsequent sale is typically treated as a capital gain/loss (although this is still grey). The reward income may be subject to self-employment tax if the activity is a "trade or business." Trade/business income and deductions are reported on Schedule C if applicable: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf . However, hobby income is reported as "other income." While deductions can be claimed against trade/business income, no expenses can be claimed against hobby income for years 2018-2025 (for tax years before 2018 the expenses would need to exceed 2% of the individual's gross income and the taxpayer is also an "itemizer").
(2)Note on Basis Tracking: There is no official basis method prescribed for tracking cryptocurrency trades. However, the softwares commonly allow "First In First Out" (sells the earliest lots of crypto acquired first), or Last In First Out (sells the last lots of crypto acquired first), a specific identification method or some other metrics. The IRS should be coming out with official guidance soon to address the basis issue.
(3)Note on Airdrops/Forks: The IRS will be coming out with offical guidance soon that addresses the tax treatment of forks.
The IRS is coming. Each day, they become more sophisticated in tracking non-compliant taxpayers. Voluntary compliance puts taxpayers on the right side of history.
If you or a friend needs general guidance on the taxation of cryptocurrency or Steem earnings, please feel free to check out my free "e-book"! And, of course, it is always recommended to contact a tax advisor.
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post does not create a client relationship between the author and the reader.