Tax Implications Of Cryptocurrency

Learn how your crypto exchanges affect your taxes and the reporting regulations in 2021.

Research shows that the crypto market is continuing to add millions of investors around the world with its largest market in Turkey with 20% market adoption. With 97% investment confidence, the cryptocurrency market size is projected to reach $1087.7 million by 2026. 

With billionaire CEOs like Elon Musk discussing the benefits of crypto, the market is in its expansion stage, where a single Bitcoin costs $46,000 as we’re writing this. Look at Bitcoin trends here.

These simple statistics show us that the hype and the investments in the crypto market are headed north. Further, survey responses show that 1 in every 10 Americans is investing in cryptocurrency. This means that the crypto market has a fascinating number of investors.

These facts bring home a very important question. 

Are cryptocurrency transactions reportable? Are they subject to IRS taxes?

The following will discuss in length the tax implications of crypto transactions and the various ways crypto transactions can be reported to establish regulatory reporting and tax compliance.

Do You Have To Report Crypto In IRS Forms? 

Yes. All crypto transactions are reportable and must be reported in the appropriate IRS forms. Every single person or entity that is investing in crypto or uses crypto for a transaction is required to report those transactions in their annual IRS tax reports.

Since IRS treats cryptocurrencies like property, the tax principles that apply to a “physical property” will also apply to your virtual property, aka cryptocurrency.

The IRS is aware of various uses of cryptocurrencies but pays special attention to crypto transactions since cryptocurrencies are frequently used in illegal transactions.

How Much Tax Should You Pay For Crypto?

Cryptocurrencies are treated the same way a property is treated, according to the IRS. This means that the same tax principles and regimes you have been following to report your physical properties will be used for cryptocurrencies.

It is also worthy to note that the IRS requires taxpayers to recognize all kinds of payments made through virtual currencies and all income generated through the crypto trade or crypto income earned. Basically, every transaction that involves crypto must be recorded and reported on IRS forms.

There is no predetermined threshold of the tax amount you are supposed to pay. The tax varies according to the amount you have transacted, gains you have made through crypto trading, and the number of transactions that occurred during a tax year.

Which IRS Forms Should You Use To Report Cryptocurrencies? 

The following forms are used to report a variety of crypto transactions. 

Form 1099-K

Payment card transactions and payments in settlement of third-party payment network transactions amounting to $20,000 or more must be reported on this form. If you have recorded more than 200 transactions of the above, then they all must be reported on this form with the valid tax details of the recipient. eFile Form 1099-K.

Form 1099-B

If you provide brokerage services to entities that trade with crypto then all incomes you receive through the transactions have to be reported on Form 1099-B. Corporations that pay brokerage payments for sales and proceeds through crypto trade transactions must report the same on Form 1099-B. eFile Form 1099-B.

Form 1042-S

If you have paid in cryptocurrency or a virtual asset to foreign nationals in exchange for their services or products or as pay, their incomes are subject to tax withholdings. The tax withheld from their incomes must be reported on Form 1042-S. eFile Form 1042-S.

Form 8949

Transactions involving properties and assets and any capital gains or losses made on the capital assets must be reported on Form 8849. Do note that the IRS treats your cryptocurrencies and virtual assets as capital assets. So, gains you make on these capital assets are subject to taxes.

Form 5498

Form 1099-R and Form 5498 are used to report Individual Retirement Arrangements (IRA), Rollover Contributions, Fair Market Value (FMV) of the account, simplified employee pension (SEP), and more. If you have made any roll-over contributions to individuals amounting to $10 or more in crypto or with “real money” in relation to a crypto transaction, then such contributions have to be reported on this form. eFile Form 5498.

What Are The Penalties For Not Reporting Crypto Exchanges In IRS Forms?

The IRS is stern about crypto transactions as it is. With the Bipartisan Infrastructure Bill being passed, virtual transactions, including cryptocurrency exchanges, crypto trading, virtual asset trading, and more will be subject to unerring and meticulous monitoring.

This means that the IRS is now more aggressive in its approach to regulating individuals and entities to comply. The IRS will not hesitate to penalize businesses if it observes non-compliant practices and regimes. 

When you do not report your crypto incomes with the IRS, you are basically hiding your income. This is treated as tax evasion. And tax evasion could break all hell loose. 

The IRS will penalize you more when you willfully disregard your tax obligations. When you fail to file your returns and thereby, fail to report your income, you are likely to invite unprecedented IRS audits and penalties (plus interest) on every income you have earned through the years through crypto and failed to report. 

Using Tax1099 To Automate Your Crypto Transaction Reporting

Businesses are finding it hard to record and report their crypto transactions due to the large volume of transactions and varied tax regimes. 

Tax1099 is an IRS-Authorized tax compliance enabler helping 150,000+ businesses with crypto tax reporting. 

Tax1099 brings to you digital tax management software, wherein you can import all your crypto transaction data, select the forms to report your crypto transactions, validate the tax information, and e-file securely.

Learn all about our crypto tax software here.

Learn more about our API solutions here.

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