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The value of cryptocurrency is plummeting. Here’s how it affects your income.

This year, cryptocurrency investors could contend with more than just market instability. The taxman is investigating your trading activity.
Bitcoin climbed to new highs over the weekend, approaching $42,000 on January 8. However, due to a sell-off in cryptocurrencies on Monday, bitcoin’s value plummeted, and it is now floating about $33,000.

If you see the price drop as a buying opportunity or a signal to sell, you’ll need to report it to the IRS.

Transactions you make this year will need to be recorded when you file your 2021 tax returns in the spring of 2021.
On the front page of the 2020 federal income tax return, the taxman asks a yes or no question: “Did you obtain, sell, give, swap, or otherwise gain any financial interest in any virtual currency at any time during 2020?”

“If you use bitcoin a lot, not only is any transaction theoretically income or a deduction, but you might have a reportable benefit on that bitcoin when you use it to pay for goods,” said E. Martin Davidoff, partner-in-charge of Prager Metis’ national tax controversy practice.

Records in perfect condition

The act of purchasing and selling cryptocurrency isn’t the only one that necessitates reporting.
You’d still have to check the “yes” box on your tax return if you got some cryptocurrency for free or used it in exchange for products or services.
It’s also a reportable transaction to exchange the bitcoin for other assets.
This is where things can get complicated since users could be trading crypto on different exchanges or platforms.

For tax purposes, certain exchanges can only provide you with a Form 1099-K. If you’ve received gross payments of more than $20,000 or completed more than 200 transactions, it includes information about your operation.
That means the investor bears the primary responsibility for accurate recordkeeping, filing, and tax payment.
Davidoff explained, “You have to keep track of every transaction you did, every sale.”

Tax treatment as property

In general, the IRS treats virtual currency as property. That means that if you sell your stock, you’ll either make a profit or a loss.
Meanwhile, any cryptocurrency salaries you receive will be registered on a Form W-2, which your employer is required to give you by the end of the month. The payment will be subject to federal income tax and FICA taxes, much as salaries earned in dollars.

Mined cryptocurrency must be included in the taxable profits as well. You will consist of the fair market value on the day you got it in this situation.
Failure to disclose income will result in penalties and interest, as well as imprisonment and fines of up to $250,000.
The IRS did send letters to thousands of taxpayers with virtual currency purchases in 2019, informing them that they needed to pay back taxes and file amended returns.

The fundamentals

Tax practitioners recommend keeping accurate records of your basis or your initial investment in the asset, in addition to monitoring your transactions.
It’s also important to consider how long you’ve had the asset before transacting with it.
If you keep your virtual currency for more than a year, you’ll get preferential long-term capital gains treatment when you sell it. In that case, the tax on appreciation maybe 0%, 15%, or 20%.

Ordinary income tax rates apply if you sell your virtual currency less than a year after purchasing it. These percentages can reach as high as 37%.
Even if you use bitcoin to purchase items from a retailer, you must monitor your foundation, so be careful how you transact.
“If you have to choose between using your US currency and crypto, you don’t have to monitor the basis with cash,” Davidoff said. “It’s giving me a headache.”

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