How Do I Report Crypto On My U.S. Tax Return?
Tax season is right around the corner, which means that you’ll need to start preparing your US tax return and report your crypto transactions. However, with limited guidance and information available about how to do so, figuring out what you need to report can be challenging, given the complex nature of crypto transactions. So, how do you keep yourself out of trouble and report your transactions appropriately? Our guests, Victor Jaramillo and Seth Hertz share insights on how to report crypto on your US tax return.
Table of Contents
What is the IRS looking for when it comes to people trading crypto?
The IRS is primarily interested in people who are trading crypto for profit. Regardless of whether you’re making a ton of money or minimal gains from your crypto transactions, you’ll still need to report your crypto transactions on your US tax return.
When Bitcoin first began gaining popularity back in 2008, there weren’t any rules or measures set in place for reporting your gains to the government. In 2014, the IRS released its first guidance surrounding crypto with Notice 2014-21. This basic document discussed how the IRS would apply general tax principles to cryptocurrency. The basics include reporting crypto as income, and when you sell it, it’s considered capital gains. However, this has evolved over time.
Recently, the IRS has updated its regulations and rules surrounding cryptocurrency in the form of an FAQ. However, it’s important to note that this has not been vetted at a different level like a Rev ruling or gone through the notice and comment process. Long story short, it’s guidance, not law, but you still need to report it.
The IRS is very interested in cryptocurrency compliance. In the 2018 and 2019 returns, a box appeared on Schedule A that asked if you have any interest in or currently possess cryptocurrency. In 2020, this same question appeared again on the front page. When you sign your tax return, you sign under penalty of perjury, and if you don’t check that box, you might end up running into trouble later down the road.
Do I need to report if I’m holding or have sold crypto on my tax return?
The way you need to report your cryptocurrency has to do with what you’re doing with it. So, for example, the rules differ depending on if you’ve received a coin, how you receive that coin and if you sell it.
If all you’ve done is purchase cryptocurrency through an online exchange, you have a capital asset. In that situation, there is no capital gain or loss to report until you’ve sold the coin. While you’ll still need to report that you purchased it, checking that box on the front of your taxes, you won’t need to report capital gains or losses on your purchase because you haven’t done anything with it.
However, in the cryptocurrency world, it’s all about trading and selling, and this is where your purchase becomes taxable in the eyes of the IRS. So whether you purchase goods and services with crypto, sell your coins for USD, or any other transaction where it exchanges hands, you’ll have a taxable transaction. In addition, you need to report your capital gains or losses on those trades as well as any interest earned on them.
Will I ever have ordinary income from cryptocurrency?
Not every transaction will end up working out as a capital gain or a loss. In fact, you will just have ordinary income in some cases because you’re only going to get that coin.
For example, if you received a coin that’s worth X amount of dollars that day that you got it, but you didn’t pay X amount of dollars for that coin, you now have recognized income at that point. The difference between X and whatever you paid for it, which may just be X if you received it for free, is considered income. It’s also regarded as ordinary income if you decide to get paid in cryptocurrency for your salary instead of USD. No matter what, you’ll still be reporting the value of the coin.
If that sounds confusing, the easiest way to look at it is to compare it to benefits at an everyday company. If you are working for a company that offers equity awards, such as a restricted stock award, and that vests, giving you stock of the company, you’ll still have to report the value of that stock. While we’re talking about coins instead of stocks, it’s essentially the same principle.
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“I certainly recall a conference call recently where someone had got paid in Bitcoin (BTC). Do I need to report that on a tax return? They said, well, certainly it’s income, it’s no different than, you know, getting paid for doing work at McDonald’s or anything else. He says, well, but isn’t it anonymous? How are they ever going to know? I just have to pay income when I sell it, right? Not when I receive it. The answer is no. If you’ve received it for services that you’ve provided, that’s income.”
– Victor
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Do I Need To Report Cryptocurrency If I gifted or received a gift?
Here’s a true story… at a recent Buccaneers baseball game, Tom Brady made his 600th touchdown. One of the team members surprised a fan by giving them the ball that scored that touchdown. However, Tom Brady wanted the ball back because this was a significant accomplishment. So, in exchange for game tickets and a signed jersey, the fan gave back the ball. Later on, Brady gave the fan a Bitcoin as a sign of appreciation. Right at that point, they’ve entered into a transaction.
Both the fan and Brady will need to report this to the IRS because there was a gain and loss. So regardless of how you receive crypto, whether it’s from trading or receiving it as a gift, you’re still going to need to report it on your taxes.
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Do I still need to report crypto if I live outside of the US?
With cryptocurrency, two things are going on here, there’s someone who wants to invest in crypto, and then there’s someone getting paid in crypto, and these are being handled quite differently.
If you’re investing in crypto, you’re in a situation where you buy it for X and sell it for Y. Hopefully, you made a profit, and that’s going to be calculated as capital gains on your US tax return. But, on the other hand, if you were paid in crypto, it will count as ordinary income. So, does it make any difference where you live or where you were when you purchased it?
The short answer is no: If you’re a US citizen or green card holder, or even a visitor on a visa, you’ll still need to report cryptocurrency no matter where you are in the world. The IRS still wants you to file a return and comply with all the information reporting obligations. You’re still subject to US tax law, which doesn’t change just because you happen to be living outside of the country.
Unfortunately, reporting can get very tricky when it comes to dealing with citizens outside of the country. There are many situations where you might not realize that you have had to file taxes with the United States. For example, even if you moved to another country at four years old, you’ve become a permanent citizen of another country, or even if you’re a citizen of another country, but your parents spent enough years over in the United States as citizens, you’re still obligated to report taxes because you’re technically still a US citizen.
Can You Renounce Your Citizenship To Avoid Having To File US Taxes?
Suppose you’re living abroad permanently or even a citizen of another country. In that case, you might have considered the idea of renouncing your citizenship, so you don’t have to report your gains or income to the United States government. However, the truth is that you can’t avoid your past taxes, but renouncing would stop you from having to pay taxes in the future.
However, it’s essential first to consider the emotional side of what that would mean to you. For example, did your parents migrate over? Is a US passport valuable to you? How would giving up your citizenship would impact your everyday life.
Second, it’s important to consider what compliance needs to be done to get ready for the act of renouncing. The implications of renouncing look different depending on if you’ve done compliance the right way or if you’ve avoided it.
For example, depending on your income, you might need to pay an exit tax if your net worth is over $2 million or your average annual net income is more than $172,000 for the five years before terminating your residency. You’ll also need to ensure your taxes have been filed accurately for the last five years.
As a US citizen, there’s no way to get away from these obligations, meaning you’ll need to ensure you file your cryptocurrency, income, pensions, and any other taxable assets for the past five years correctly. The best thing you can do is be as compliant as possible, understand the rules and regulations, and seek help from professionals who can guide you through the process.
However, as a green card holder, it’s also important to know that you may be held to the same ex-patriation rules if you’ve been here for a long enough time. Typically, the government will look at the last 15 years. If you’ve been here for 8 out of 15, you’re a long-term green cardholder. However, if you haven’t reached this time yet, the benefit that green card holders have that US citizens don’t have is that they can invoke the treaty to be a treaty partner. If they do it soon enough, they can prevent becoming a long-term green card holder and not be subject to the same rules.
Behind The 5 Years Of Tax Returns Compliance Requirement
If you’re trying to get out, it all comes down to compliance. The IRS put out the five-year compliance requirement because they want taxpayers to catch up on their filings. So even if you haven’t filed taxes in the past, you can still amend your taxes and file for the last five years. It’s essential to come into compliance because if you’re not, you’ll be facing severe penalties and fines levied against you. Plus, you’ll have the entire renouncing process take even longer.
Working with a tax attorney or specialist can help you file differently to make sure you’re not in a bad situation, such as choosing separate instead of joint filing if your significant other doesn’t work or works more than you. This can sometimes be done to get one spouse out. However, when it comes to your net worth, the only thing you can do is give away assets or put them in non-grantor trusts.
If I Made An Honest Reporting Mistake, What Do I Do?
There are many situations where you don’t know that you have to file taxes, especially if you’ve been living abroad for an extended period of time. However, that doesn’t make you exempt from paying taxes. Not filing yearly taxes can result in tons of issues down the line, especially if you need to renew your passport or other important documents. Plus, it can take the IRS months or years to reply to everything, which only slows down the process.
If you’re waiting forever without a response back from the IRS in a reasonable amount of time, tax advocacy services are a great resource. They can essentially get into the IRS for you and move things along, so you don’t have to wait forever to have a resolution to your tax filing issues. Regardless, don’t delay filing everything as accurately as possible on your tax returns, including crypto.
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