Tax attorney Steve Moskowitz of tax law firm, Moskowitz LLP shares best practices for reporting your digital assets that can save you from big tax penalties
Since the release of Bitcoin in 2009, over 4,000 alternative currencies have emerged in the decentralized banking market. For nearly 10 years, the IRS has sought to gain a foothold in what has since become a booming market with a rising number of participating asset holders. The recent Coinbase, Inc. case ruling makes it clear that the US government is intent on pursuing digital currency holders who aren’t fully transparent in their online activity. In order to avoid heavy fines of up to $250,000 and possible prison time, it is now more important than ever to properly document and report your digital currency transactions.
Here are 5 essential tips from Moskowitz LLP to get you started:
Know your cost basis. The IRS considers cryptocurrency and digital currency property for tax purposes, and may prosecute anyone neglecting to report it on their taxes. Some virtual exchanges provide a form 1099-K to their clients, but most do not, making it your responsibility to determine the value of your digital assets. This is very important as it will effect your taxibility when you sell.
Remember that mined currency is income. If you are paid for the activity, you must pay both income tax on the amount mined, plus self-employment taxes (where applicable). If mining for yourself, your gross income must include the value of your cryptocurrency on the day it was received.
Track and report all cryptocurrency purchases and sales. If you use cryptocurrency like cash, every purchase you make – including that of goods and services – is a taxable event, and you must track details like the date of transaction and the amount paid. If you buy or sell cryptocurrency, the IRS considers the activity similar to the purchase and sale of stock, and will expect you to keep a record of all your transactions. Along with proof of the buy and sell prices and the dates of each individual transaction.
Report transfers of digital currency. The IRS may soon take the position that the transfer of digital assets is a reportable transaction, and require a report of any capital gains or losses.
Report payments made to employees, or currency received as a gift. Just as with government-backed currency, you are required to report all employee or contractor payments, and to pay employment and withholding tax where applicable. If you are gifted digital currency, report it on your taxes using the same cost basis as the person or entity who gave it to you when you sell it.
If you handle crypto or digital currency, now is the time to seek guidance from the tax attorneys at Moskowitz LLP, who can help you lay a solid foundation for your financial future. For over three decades, the experienced tax attorneys at Moskowitz LLP have provided guidance to business owners, families, and individuals looking to make the most of their income and avoid the pitfalls of poor tax planning. This year, their team is here to help you successfully navigate the rapidly changing tax climate around cryptocurrency and digital assets, and exercise sound tax practices so you won’t get blindsided in an IRS audit.
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