Did you know that the IRS treats the use or sale of virtual currency like property instead of like cash? If you didn’t, you might be filing your tax return incorrectly. To make people more aware of the tax consequences of cryptocurrency, the IRS has now put the following question on the face of your 1040 tax return: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
What does that mean for you? If you have done anything beyond just purchasing and holding the cryptocurrency, you have a reporting requirement. Since virtual currency is treated like property, it is more similar to stock instead of cash, so any gains or loss on the use of that currency needs to be reported.
Unlike stock, the tracking and organizing of virtual currency is not centralized. There is no one set of standards shared across the crypto ecosystem, which makes data collection challenging.
In addition to data collection challenges, there are also certain reporting challenges. Given the volatility of some of the exchanges, if it goes bankrupt or you lose access to your wallet, then that could be an issue if you are not tracking outside of the exchange.
To accurately report on your tax return, you will need to know the cost basis (value at the date of purchase/receipt), date of the purchase/receipt, value at the date of sale (or use/transfer), and the date the sale/transfer occurred.
You should talk with your tax professional to see if they are able to help you with the tracking of your currency or research tools that will make it easier for you. If you have virtual currency, you will want to speak with your professional well before the tax deadline.