The Internal Revenue Service (IRS) treats cryptocurrency as property. This means that when it comes to tax obligations, the agency treats cryptocurrency much the same way as it treats stocks. Just like with stocks, if you buy cryptocurrency but do not do anything with it, you generally do not need to report anything to the IRS.
If, however, you traded or sold a cryptocurrency or used a cryptocurrency to buy goods or services, the IRS will likely expect you to report the transaction. This is because now you have done something with it. Unlike cash, once you “trade” in cryptocurrency, a reportable event is created.
Why should I bother? Is the IRS really going to check this?
The IRS has made it clear that they are taking cryptocurrency transactions seriously. While you or your accountant can assist you with your reporting, we also know that the IRS tends to crackdown on those it believes attempt to intentionally thwart their tax obligations. As a result, those who have used cryptocurrency are wise to report so honestly.
The reality is that at this point it would take an intentional act of omission to keep this transaction from the IRS. This is because the IRS updated their tax forms. Tax Form 1040 now includes a direct yes or no question about use of cryptocurrencies.
Will this trigger foreign tax obligations?
The United States government does not currently consider cryptocurrency itself as a foreign currency. As a result, the only way it could possibly trigger foreign income reporting requirements is if the transaction occurs abroad. Legal and tax professionals’ currently debate whether or not this type of transaction would trigger the need to file a Report of Foreign Bank and Financial Accounts (FBAR). Although some believe this unnecessary, one thing is clear: the rules around tax obligations for cryptocurrency are constantly evolving. As such, it is generally best to fill out this relatively innocuous form and find it unneeded, then to face allegations of tax evasion if the IRS believes that you failed to file an important tax form.
Does this mean I will owe taxes for my cryptocurrency?
Not necessarily. The answer will depend on different factors. Again, like stocks, if you sell a cryptocurrency for more than you purchased it, that gain is likely subject to capital gains tax. However, there is a potential benefit. Those who sold the currency at a lower price than they purchased it could deduct up to $3,000 in losses on their tax returns.
These are just a few of the issues to navigate on this new and evolving area of tax law. It is a good idea to seek legal counsel to help better ensure you address these and related issues within the bounds of applicable tax rules and regulations.