Should I report my crypto?
During busy season, I order the same lunch at the same location everyday – they know my name and my order and it’s efficient. Last week the waiter teased that he hasn’t seen me since October and when I explained I’m a tax guy and it’s busy season he asked me, “Hey so I bought $8,000 of Shiba Inu coin because my friends were doing it and then it hit $92,000 and I sold it, but now I’m scared about taxes. My friends say they’re not going to report it and I don’t know what to do or how to handle it. Should I report it on my taxes?” I said, “Congratulations and yes. Without hesitation.”
His question perfectly summed up what I’ve heard from so many others:
It is clear that the IRS has been staffing up, hiring industry leading consultants, building up databases of crypto users, and arming themselves for a campaign against crypto non-reporters. Back in 2019, they sent out “courtesy notices” essentially letting people they already identified as crypto holders know that the IRS had their eye on them to make sure they report their crypto.
My advice is don’t hide it. Do your best to make a “good faith effort” to report it and consult with your CPA. According to the IRS:
What should I give my CPA to report my crypto?
It depends. But the more involved you are in crypto, more info may be needed. Here is a rough list of the items your CPA would want to know (If you answer “yes” to #1, then #2-3 is all we need for the majority of our clients who have crypto):
How do I calculate my crypto gains?
Without going into depth about the rules on cost basis methods, unless you had fewer than a dozen trades you should consider using software to track your gains. I recently was testing out TaxBit, which seems promising, but I thought their tax guide was a great read for anyone with cryptocurrency. You can check that out here.
If, after reading this guide and the steps below you feel like this is a lot of work, well, you’re right. But that’s the cost of doing business outside of highly regulated centralized finance.
Based on feedback from clients or others, the below software providers should get the job done for most crypto situations. Each one offers the ability to connect directly with the most common exchanges and wallets to automatically import transactions and match buys and sells.
Unfortunately, I wouldn’t trust anything to be “plug and done.” So here’s a few additional steps to consider, to help ensure accuracy of the information you’re passing off to your CPA.
I would add that I think any CPA would say it’s about getting “close enough” and is probably OK to be a little off. Your CPA can help you calibrate what is “close enough.” At the end of the day, if the IRS can come up with a more accurate number (good luck) then I think most of us would be inclined to accept it. This is about making a good faith effort and doing your best.
1099-Bs Starting 2023
Recently passed legislation will require cryptocurrency exchanges to issue a 1099-B to report gains and losses beginning with the 2023 tax year, similar to stock brokerages. At that time, not reporting crypto gains would likely result in an automatic under-reporter notice. But another reason to start using software now is your basis info will likely not automatically show up in those reports or it might not be calculated correctly. I expect a lot of 1099-Bs will show only the sales proceeds and not the cost basis of older coins. So tracking your cost basis with software may help justify and substantiate reporting a smaller gain and paying less in tax.
What about FBAR and reporting of non-US crypto assets?
FinCEN is expected to release proposed rules governing reporting of cryptocurrency held on non-US accounts, but until then they’re technically not reportable. I encourage my clients to play it safe and report the non-US account anyway on FBAR and Form 8938, since these forms don’t increase their tax liability. Most exchanges don’t provide monthly statements and backing into the “highest account value” is nearly impossible when there’s multiple trades and various crypto assets all fluctuating in value throughout the year. But for now, I ask my clients to provide a list of accounts and wallets they used during the year and at least a ball park guess of what they think the highest value was. Hopefully when FinCEN comes out with new rules there will be guidance about how to determine highest value when there’s a lack of historical records.
Can the IRS tax my crypto if it’s still in my wallet?
Yes, they can. “But the IRS doesn’t tax my IRA when it increases in value or when a company pays a dividend in stock, so how could they tax my crypto if it’s still in my crypto wallet?” There are many different “tax deferred” examples, but unfortunately they fall under specific sections of the tax code that don’t broadly apply to crypto. A crypto wallet isn’t a tax deferred account or tax exempt entity, unlike an IRA or 401(k), although it’s possible to hold crypto inside your retirement account. Payment of dividends in stocks is taxable in some situations.
But before you complain about the current tax system unfairly taxing crypto, just know that this “taxation without liquidity” problem extends in many instances beyond cryptocurrency. Employees who exercise Incentive Stock Options (ISOs) at a private company, estate taxes on large real estate portfolios, minority members in LLCs that pass-through income without distributing cash, selling over-leveraged real estate received as a gift from parents, and overseas income or gains denominated in a foreign currency are just a few examples of events that can result in U.S. taxes despite having liquidity to pay for those taxes. It’s possible that those promoting the idea that the IRS “can’t tax crypto in wallets” just have never had to deal with some of these other complex tax events. So take it with a grain of salt.
Tax Planning Strategies
For any complex tax situation, you should let your CPA know well in advance what’s going on and start tax planning early.
Ultimately, my advice is be smart, talk with your CPA, and rather than gamble with the IRS you should bet on crypto. Questions? Don't hesitate to reach out to your Sweeney Conrad professional, of contact me using the button below.
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