IRS and Its Cryptocurrency Guidelines: This Is What You Need to Know

There is still an element of confusion and misunderstanding surrounding cryptocurrencies at the moment and that could be problematic if you don’t interpret the rules correctly when it comes to the IRS, for example.

You may have to use a cryptocurrency lawyer to help you out of a tight spot or to get some professional guidance but it would also be a good idea to try and gain a good level of understanding when it comes to knowing what you can and can’t do with this virtual currency.

Here is a look at some of the key points.

The basics

A good starting point would be to appreciate exactly what a virtual currency is in terms of how the IRS views the use of this form of payment to trade goods and services.

The bottom line is that it operates in much the same way as a physical currency and the IRS views cryptocurrencies in the same way as legal tender.

However, although it is recognized as legal tender in the United States, for instance, it does not have the same status in some jurisdictions. The most recognizable of digital currencies, Bitcoin, can be traded and exchanged for into mainstream currencies such as dollars and Euros plus a whole host of other real or virtual currencies.

Tax consequences

The fact that the IRS views digital currencies in much the same way as US dollars means that they will take the same view when it comes to calculating tax liabilities.

Therefore, if you use a cryptocurrency to pay for goods or services, or hold a form of virtual currency as an investment, the general view is that all of these transactions and holdings will have certain tax implications and could trigger a resulting tax liability.

Keeping on the right side of the law

As you would expect with any form of income or monetary transaction, the IRS has created a set of rules and paperwork relating to cryptocurrencies.

The IRS will want to know whether you have acquired, sold a financial interest, or exchanged a digital currency in the last tax year.

You have the same duty of care to keep accurate records for all of your cryptocurrency transactions and the IRS will want to ensure that you include all of this information on your returns along with an accurate calculation of the taxes you owe.

It was in 2019 that the IRS introduced a specific question relating to cryptocurrency transactions on its forms relating to additional income and adjustments to income.

There are some concerns that the IRS will be flagging accounts for audit where you confirm that you have traded cryptocurrencies but the feedback from tax professionals has been that the inquiries triggered are only basic questions that can often be answered easily.

The main point to remember is that if you are not sure where you stand relating to your liabilities when it comes to trading cryptocurrencies it would be wise to seek some professional guidance to ensure you stay on the right side of the law.