A brand-new draft of the 2020 IRS 1040 Tax Return Form has been issued. The form requests about virtual currency on the very first page. The move is a sign to cryptocurrency traders that the IRS is paying closer thought than before.
They’re on to you, and they want their cut. The new Internal Revenue Service (IRS) tax return 1040 for U.S. citizens has been released. For cryptocurrency holders and traders, there’s something new on the front page: Virtual Currency.
Uncle Sam is watching, and he wants his cut.
Working on your taxes is never fun, it never was. The IRS’s forms are complicated to fill out and, and that’s why many people opt to use a tax service like H&R Block, or an online program like TurboTax. (Pro Tip: The IRS has a list of free tax filing software. Anyone making under $69,000 a year can use it).
The form starts with the usual essential identifying information: Single, married, name, address, social security number, in 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?
Hold the phone! That was not there last year! Actually, the question about virtual currencies came at the very end of the 2019 tax form. There wasn’t any question about that in 2016.
Perhaps watchful of competition, the IRS needs to keep tabs on currencies other than the dollar. Some cryptocurrency is actual currency, and profits made are taxable events. But that only begins to scratch the surface.
IRS Muddies the Waters
The gloom happens when tokens are thrown into the mix. Some tokens create income either for proof of stake or interest.
Does the IRS handle interest made form DeFi the same as interest earned from CeFi or a traditional bank account? Are utility tokens “virtual currencies?” Are PoS block rewards treated the same as Bitcoin, or should they be treated like dividend re-investments?
The responses are not entirely clear, but one thing is for sure: Traders and investors should think about what they are doing now when planning for how they will pay taxes next year.
Striking questions linked to virtual currencies on page one of the form shows just how important the issue is becoming to regulators.
Route of Slightest Resistance
Despite the complicated nature of these taxes, cryptocurrency has some allies at the top.
Tom Emmer and the Congressional Blockchain Caucus lately wrote a letter to the IRS to push favorable regulations for proof of stake tokens. The technology, according to Emmer, is powerful, and the U.S. could lag by over-regulating.
A number of guides, such as the materials from Coinbase, offer suggestions on how to report crypt assets to the taxman. With each trade considered a taxable event, this is a lot of work. Whatever happens, capital gains and losses can wash themselves out, so traders should keep careful track of everything.
It should be regarded that long-term capital gains are taxed at a much lower rate. So timing a sell in a way that it lasts over a year could be beneficial.
Notwithstanding a lot of details to iron out and the struggles ahead, legislators have still not decided exactly how to treat digital currencies. Some, like attorney Justin Wales, are concerned that the IRS is encroaching on liberty by asking the nitty-gritty of traders’ crypto deals.
Nevertheless, the IRS is perhaps most concerned about getting its piece of the pie through taxes.