It would not be uncommon to hear tax attorneys in San Jose discussing the fact that 2022 will be the first year many taxpayers find themselves obligated to report transactions completed with cybercurrency to the Internal Revenue Service. The filing deadline of April 18 is looming, and this process can be perilous for some taxpayers, particularly if they have not yet familiarized themselves with the new rules concerning crypto transactions and how they impact the amount of taxes owed.
Two Common Misconceptions Filers Should Avoid
According to a Bay Area tax attorney, certain tax problems can occur for filers who have inadvertently embraced one or both of two common misconceptions. Austin Woodward, CEO of TaxBit, stated that it is very common for investors to believe that cryptocurrency transactions cannot be traced, or that such transactions need only be mentioned if the virtual currency has been converted to traditional money. TaxBit is an accounting platform that specializes in Bitcoin, Ethereum, Litecoin, and other types of cryptocurrencies.
Cryptocurrency Is Not Anonymous
Numerous tax planning professionals and tax attorneys must often clear up the commonly held belief that cybercurrency transactions are anonymous and thus untraceable. Many individuals think that, if a modest amount of Bitcoin was purchased and yielded only a small gain when it was sold or spent, reporting it is not very important. In reality, it may result in the eventual owing of back taxes or other problems that come from failing to properly report income.
For such individuals, failing to report gains from crypto could lead to fines or lengthy audits by the IRS, an agency that has sufficient infrastructure and employees positioned to chase known users of cryptocurrency who don’t report this activity on their returns. This means that investors and other taxpayers must be diligent about logging their crypto holdings, regardless of how small, so that the proper amount can be declared and taxed if taxes are indeed owed.
Crypto Transactions Must Be Reported Even If the Crypto Wasn’t Converted to Money
Many investors in Bitcoin and similar virtual currency erroneously believe that, if the crypto was never exchanged in any way for a type of traditional currency, it is not worthy of a mention on their tax return. However, Austin Woodward has also stated that there are quite a few scenarios in which such currency is indeed reportable, even if never converted to money. The following is a list of these scenarios:
- Using crypto to make a purchase
- Exchanging one kind of crypto for another
- Receiving cryptocurrency as a gift
- Earning interest on cryptocurrency
On the 1040 form for 2022, after the standard identifying information is requested, the first item filers will have to face is a question about virtual currency. The question addresses activities such as receiving, selling, exchanging, or otherwise disposing of any financial interest in any type of cybercurrency. If the crypto was purchased but was not used to buy anything, and the purchaser did not sell it, then that question can be answered with a “No,” since there were no taxable losses or gains to report. However, if the virtual currency was bought and sold, or it was otherwise exchanged for or spent on any type of digital token, the filer is obligated to answer that question with a “Yes.”
Those who dealt in virtual currency in a way that might impact their 2022 tax return should contact a crypto currency tax attorney in San Jose or a tax planning professional to avoid potential problems. Until filers are familiar with the new regulations regarding cryptocurrency, professional advice should be sought to avoid any problems that may arise from misconceptions about tax laws.