Here’s what you need to know when reporting virtual currency to the IRS

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The value of Bitcoin is skyrocketing. If you’re planning on selling now and pocketing the gains, Uncle Sam is going to want his share.

This week, the cryptocurrency hit price it hasn’t seen since 2017, climbing toward $18,000 for one unit of Bitcoin. Over the course of 2020, it’s price has risen by more than 150%.

Just be aware that whether you mined, purchased or sold your share of Bitcoin this year – or any other cryptocurrency – you’ll have to tell the IRS when you file your taxes next spring.

Indeed, the front page of the individual income tax return, aka Form 1040, asks a yes or no question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

“That’s one of the things taxpayers need to pay attention to,” said Kirk Phillips, CPA and member of the American Institute of CPAs’ Virtual Currency Task Force.

“We’ve seen CPA firms that haven’t really wrapped their head around this stuff,” he said.” They have filed the returns but didn’t correctly check the box or didn’t report the transactions.”

Not just buying and selling

Understanding your tax treatment

People have multiple exchanges and the more spread out the cryptocurrency is, the more challenging it is to gather it together and do your calculations.

Kirk Phillips, CPA

member of the American Institute of CPAs’ Virtual Currency Task Force

“That threshold is so high,” said Andy Phillips, director at The Tax Institute at H&R Block.

“A lot of taxpayers either don’t do a lot of transactions,” he said. “Or if they do many of them, they use multiple exchanges and don’t hit the threshold on any one exchange.”

Even if you miss the threshold, you’re still required to report the transaction and pay taxes owed.

Getting paid and mining

If you received virtual currency from an employer, then it’s treated like wages. Federal income taxes and FICA taxes apply. It will be reported on your Form W-2, which you should receive from your employer by the end of January.

If you mine cryptocurrency, you’re also required to include it in your taxable income. You would include the fair market value as of the date you received it.

The IRS has been cracking down on unreported transactions in recent years. Last year, the agency sent letters to more than 10,000 taxpayers with virtual currency transactions, telling them to pay back taxes and file amended returns.

Failing to report income can carry hefty penalties and interest. In the worst case, you could go to prison and be fined up to $250,000.

Three crucial factors