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Do I Need to Pay Tax on my Crypto?
If you have sold, converted, paid or earned using crypto you may owe tax. Even if you are a “Hodlr,” or someone who buys but does not sell their crypto, it’s worth checking. The amount you need to pay depends on how long you have held the crypto and your ordinary income tax rate.
The IRS generally views, "the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, as events with tax consequences that may result in a tax liability.”
All US taxpayers are required to report all income and pay the correct amount of taxes. The IRS can assess penalties for non-filing, non-payment, underpayment, negligence, and many other violations of US tax law.
Furthermore, tax evasion or fraud could lead to other penalties, including possible imprisonment.
Ultimately, the IRS holds you responsible for reporting your income and taxes. As they increase their involvement in the cryptocurrency market, taxpayers will need to stay on top of their activity to avoid penalties.
In recent years, the IRS has taken additional steps to enforce the tax code on taxpayers using the cryptocurrency market. This includes hiring specialized auditors, getting customer information from exchanges like Coinbase and Kraken, and sending warning letters to cryptocurrency users. Furthermore, legislation from Congress in the future could increase regulations on cryptocurrency exchanges operating in the US.
As the IRS increases their resources in the cryptocurrency market, it’s critical for taxpayers to stay on top of their cryptocurrency transactions and report as accurately as possible. As the cryptocurrency market continues to grow, blockchain technology makes it easy for tax professionals such as accountants, tax attorneys, and even the IRS to find your transaction history.
For US cryptocurrency users, accounts with a non US exchange isn’t considered a foreign financial account at this time. As such, US cryptocurrency users do not have to file FinCEN Form 114 (also known as FBAR), to report activity on foreign cryptocurrency exchanges. However, legislation or administrative rulings in the future could require taxpayers to file this form. Similar to FBAR, the IRS has Form 8938 (also known as FATCA). As of right now, the IRS has not stated whether this form must be filed. Since FBAR is not required at this time, you may not have to file FATCA.
Because of increasing pressure from the IRS, a growing number of exchanges are now making an effort to send out IRS Form 1099-K to US users over certain thresholds, but you should not rely on or wait for this to arrive.
The 1099-K does not provide a complete picture of your cryptocurrency transactions within the year, and relying on it could lead to an overestimation of taxes owed.
The 1099-K only reports your total sales volume, including transactions where you moved cryptocurrency between wallets and exchange accounts you own (which are non-taxable events). The 1099-K does not calculate your total gain or loss, creating the illusion that you have a higher tax liability, creating a higher tax bill.
A copy of the 1099-K is also sent to the IRS, but you should not assume that you do not have to do anything, as this will lead to inaccurate reporting and increased liability. To accurately report your cryptocurrency transactions on your taxes, you need to complete a Form 8949 which will show the cost basis and gains or losses from your cryptocurrency.
The IRS states that “you must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.”
As stated previously, the IRS holds you responsible for reporting your income and transactions. Taxpayers who fail to timely or accurately report their crypto transactions, underpay with respect to taxable crypto transactions, or otherwise fail to comply with US tax laws may be subject to penalties or interest on tax owed, among other penalties.
We have written this guide to detail how cryptocurrency is taxed in the US to help you understand if you need to pay cryptocurrency tax and how to calculate the tax you need to pay. We cannot provide advice but if you are unsure you should consult with a tax professional about your individual tax circumstance.
Click next to see which taxes apply for different types of cryptocurrency activity...