Did You Answer ‘YES’ To The New IRS 1040 Form Question Around Cryptocurrency?br>
As bitcoin started to take off and increase in value and adoption, regulators, lawmakers and bankers debated whether it was a currency or a commodity. The one area they all would agree on is that bitcoin should be taxed. The IRS declared it property making property transactions apply to cryptocurrency, similar to works for art or non-exempt real estate transactions. Starting this year, the IRS 1040 form has question zero right at the top that asks if virtual currency is owned by the taxpayer. For anyone who answers yes, they need to be able to accurately account for all cryptocurrency transactions.
Consumers and businesses who accept or hold cryptocurrency may have received a 1099-K earlier this year from their exchange outlining the gross amount of their transactions in 2019. While a 1099-K form keeps that exchange compliant with the US government, the information it contains is not useful for filing taxes.
The purchase, sale, exchange or holding of virtual currencies or the use of virtual currencies to pay for goods or services creates a taxable event. What taxpayers need is a completed Form 8949 as it shows capital gains and losses from investments such as cryptocurrency. The challenge is that traditional tax and accounting packages do not offer native support for crypto assets. Holders of cryptocurrency do not receive monthly statements. Bank statements, the “single source of truth” for cash transactions, are not available.
Crypto holders need to perform their own liability assessments and track each and every transaction. This can be a tedious and time-consumer project. The new digital economy is advancing traditional financial and accounting support structures to account for virtual currencies.
For a software program to be effective in crypto, it must connect to the most common cryptocurrencies, exchanges and wallets in use. To get the information needed for Form 8949, the assessment has to produce reports including wallet transfers and balances, capital gains and losses and exchange orders – among many other variables – to get an accurate view of the entire crypto portfolio. Any solution should be able to generate key reports that can then be imported into traditional tax reporting systems.
For anyone in the US, remember to file Form 8949 for sales and other dispositions of capital assets by July 15. For those lucky enough to live in Belarus, Germany, Malaysia, Malta, Portugal, Singapore, Slovenia or Switzerland, these countries do not currently tax cryptocurrency investments as property.