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Crypto Investors Need to Check These IRS Filing Rules

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Important Clarification On Cryptocurrency Reporting Rules

According Cointracker, during the AICPA National Tax Conference in Washington, DC, IRS and FinCEN officials provided more clarity on cryptocurrency reporting requirements.

Like-Kind Exchanges

The panel clarified:

  1. That the crypto FAQs of 9 October 2019 were clarifications of the original crypto tax guidance and that it applies retroactively. What this means is that taxpayers should have been following the ‘new guidance,’ since the publication of original notice in 2014.
  2. Although like-kind exchanges were for the first time explicitly disallowed for crypto after January 1st 2018, it was, in fact, never allowed at all.
  3. Hence, the IRS can take retroactive action on tax returns, which assumed like-kind exchange treatment for crypto before January 1st,
    • Those who did the same can use Coin Tracker to calculate their capital gains on their cryptocurrency without like-kind treatment to amend their returns.

Specific Identification

The panel clarified:

  1. FIFO (First-in first-out) is the default method to account for cryptocurrency disposals.
  2. Specific Identification can be allowed if you can document the particular digital identifier and show
    • The date and time of acquisition of every unit
    • Your basis and the fair market value of every unit at the time of purchase
    • The date and time of disposal of each unit
    • The fair market value of each unit upon disposal
    • The amount of property or money received for each unit.
  3. As long as taxpayers meet the conditions in (2) above, it allows for HIFO (highest-in first-out), LIFO (last-in-first-out), and any other type of specific identification accounting, including fungible assets from exchanges.
  4. This applies retroactively to historically disposed assets.
  5. The new FAQs are merely a clarification of previously released crypto guidance.

 

 

Foreign Reporting (FBAR)

  1. Crypto held in international exchanges are NOT required to be reported under FBAR (FinCEN 114).
  2. FACTA (foreign reporting on IRS Form 8938) has not been confirmed for crypto yet.
  3. Until it is confirmed or denied, it is advisable that those who fall under FACTA thresholds to file on their crypto.

Airdrops

  1. IRS FAQs about airdrops only cover new coins after a hard fork.
  2. It remains unclear whether true airdrops are taxable income or not.

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The IRS Refunds Compliant Crypto Taxpayers

The US has no crypto regulations at all.  There is no indication that this state of affairs will change soon.  Those crypto owners and traders that cooperate with the IRS will see benefits. Tax reductions and even refunds are in the cards if you comply.

Rewarding Compliance

Crypto users who complied with recent letters the IRS sent out in which they requested proof of trades and transactions in support of tax reports submitted, already received tax refunds.  The main goal of the IRS is not punishment.  One crypto investor received notice from the IRS that he owed $3,900 in taxes. The investor paid up, and to his surprise, the IRS rewarded his compliance with a full refund. The IRS sent out 10,000 letters to crypto investors. How many of the investors received refunds remains a closely guarded secret.

cryptocurrency tax

Tax Planning For Cryptocurrency U.S. Investors

Big Brother Is Watching

The strategy is to educate crypto users as to the reach of the IRS in the world of crypto.  By showing crypto users that the IRS knew all about their additional crypto accounts, which they failed to disclose in their reporting of trades and transactions, the IRS hopes for extensive compliance.

The IRS does not always have accurate information. In cases where the investor exchanges one currency for another without making any profits on the transaction, the IRS may not understand what happened. To be sure, they will know about the transaction, but nothing more.   Nevertheless, if the agency made errors, it rewarded those who complied with their request for clarification with refunds.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

If you would like to benefit from our expertise in these areas, or if you have further questions on this advisory, don’t estimate to contact our specialists or call us 786 462 7899.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized in Tax Planning for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution and Offshore Strategies. You can email him to fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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