Whether you bought your first Bitcoin or your uncle gifted you Ethereum, how you got it matters for tax purposes. Every year you should also look into whether you received any air drops or coins from hard forks or staking. These along with mining and receiving crypto as payment are taxable as ordinary income upon receipt and may be subject to other rules.
2. When did you acquire it?
Long-term or short-term is obviously important to know for capital gains. But knowing when might give clues to whether you held a coin when it forked or what your basis might be if you lost your records from when you bought it years ago.
3. Have you sold any in the past? If so, when?
If the answer is yes, then hopefully this was already reported correctly. If not, follow-up with your CPA to confirm because the IRS is taking virtual currency very seriously. Also, if you used a third-party software or website to calculate your gains and losses, you should make sure you’re using the same method for calculating basis year over year. Our recommendation is to start with FIFO and stick with FIFO. But sometimes it’s a little trickier than that.
4. How do you hold it and trade it?
Hard wallet, cold storage, online exchange, or “other” (paper wallet anyone?), how you hold it is useful for tracking gains and losses by account. Also, it clues us into the next question…
5. Were any of your cryptocurrency accounts based outside the US?FinCEN has indicated that they plan to require foreign accounts holding virtual currencies to be subject to FBAR reporting. Similarly, there’s Form 8938. These and other foreign disclosures don’t increase your tax liability, but can carry hefty penalties starting at $10,000 for not timely and properly filing.
6. How do you keep track of your gains and losses?Whether you use a spreadsheet or software, recording keeping is probably the bane of every cryptocurrency investor. But you have to and those records must be accurate. I would not expect 1099-B statements from brokerages anytime soon (just look at forex trading). Third-party tracking tools have come a long way, but the burden of accounting for your transactions ultimately falls to you.
7. Did you receive a 1099-MISC, 1099-K, or any other tax form?If you sold more than $20,000 of cryptocurrency or had more than 200 transactions in 2019 with certain exchanges, you might’ve received a 1099-K and asked yourself, “What is this?” It is odd and confusing to many individuals, since most people who’ve sold products online might recognize Form 1099-K as the form merchant service providers send. Coinbase has posted that for 2020 they will provide a 1099-MISC in certain situations. https://help.coinbase.com/en/pro/taxes-reports-and-financial-services/taxes/coinbase-tax-resource-center Whatever the form you received, pass it on to your CPA.
8. Did you receive a notice from the IRS?In the last couple years, the IRS has done several campaigns to educate and inform taxpayers of the obligation to report cryptocurrency transactions. If you’ve received such a notice, it’s likely the IRS suspects you have some and are giving you fair warning.
9. Did your business receive any cryptocurrency?Blockchain startup or a coffee shop accepting BTC for joe, if your business is receiving cryptocurrency then make sure you have a solid plan with your CPA to account for those transactions coming in, going out, related gains and losses translating those to fiat, and other compliance matters.
10. Did you pay anyone with cryptocurrency?The IRS has made it plenty clear that cryptocurrency payments are subject to the same W2 and 1099 reporting requirements as cash. But also, if you’re paying for personal items or services like coffee, subscriptions, or video games then you still need to report the gain you had while holding those cryptos, however, the losses are nondeductible.