Crypto owners, the best crypto tax tip I can give you is that you should harvest your losses periodically before December 31. This requires keeping good records of your trades all year, which will reduce your tax burden or boost your refund. Just as it is wise to do you tax planning occasionally during the year, don’t yield to inertia and expect your tax preparer to perform magic in 2021.

While the global coronavirus pandemic has been grabbing headlines lately, crypto tax owners should remember the following developments, especially if they intend to file their taxes by July 15, 2020.

Crypto question on your 2019 Form 1040

We now must declare if we “received, sold, sent, exchanged, or acquired virtual currency by any other means” on Schedule 1 of Form 1040. This question makes it harder for crypto tax non-filers to shake off a charge of willful tax evasion in the event of a tax audit. The IRS is continuing a strategy it first applied on holders of offshore bank accounts, rehashed for crypto because it proved to be winning formula. Those who don’t report or who willfully misreport their crypto holdings will be risking criminal tax prosecution.

Crypto tax audits are here to stay

Since July 2019, the IRS has been auditing crypto owners after it introduced three crypto letters which you can review here. These “educational letters” were quickly followed by CP2000 tax audit notices, which affected more people than those people caught up in the Coinbase John Doe summons of 2016. Additionally, Letter 6173 promises to list exact years the IRS believes you should have reported crypto on your tax returns. This is not a surprise given that the IRS has been working with crypto forensics firm, Chainalysis, to crack down high-profile cases. The Agency is moving beyond headline-grabbing money laundering cases and into more routine enforcement of tax law involving crypto.

Speaking at a tax conference in November 2019, Don Fort (Chief of Criminal Investigations, IRS) and Paul Mamo (Director of Collections, IRS) were bullish about their ability to target the 25 million U.S. crypto owners who are not reporting their transactions. Indeed, the IRS will temporarily camp leading IRS crypto tax agents to any corner of the nation where they will assist local IRS staff in targeting crypto tax non-filers in the area.

Taxation of hard forks and airdrops

The IRS has clarified clarifying that it will tax hard forks and airdrops retroactively. Anyone who has filed prior year crypto tax returns may wish to review how hard forks and airdrops were reported, and whether it is worth amending those tax returns.

What do all these changes require of crypto owners?

Be proactive:

Don’t wait for IRS letters or notices to arrive before you start working on your crypto records. At that time, some avenues of engaging the IRS in your favor will have been shut and you may need to hire an attorney, especially if you receive Letter 6173. The IRS requires you to keep records of your crypto transactions as they happen (like a receipt), a task that is complicated by lack of uniform reporting practices and forms at crypto exchanges. Reconstructing and reconciling numerous crypto transactions under a tight deadline can be time consuming, expensive, and stressful.

Don’t forget the State:

The IRS is not the only agency that demands crypto reports from exchanges. An exchange may send the IRS a 1099K—or some other report—if you had annual transactions worth $20,000. The same exchange may send your State revenue authority a similar report once your trading hit as low as $600 in value, based on state requirements. States do share information with the IRS and both tax agencies are pushing exchanges hard on improving their reporting practices. It may only be a matter of time before what happened to secretive Swiss banks happens to crypto exchanges.

Become a prudent investor:

Beyond tax concerns, you can’t manage what you can’t measure. Right now, the best equivalent of a crypto profit and loss statement can only be attained by reconciling your trades across all exchanges and wallets. You also can’t take your gains seriously if you have omitted an entire class of expenses—taxes, penalties, interest, potential legal fees, and the opportunity cost of your time. The sooner you start this reconciliation process, the sooner you get a true picture of your investments.

If you have crypto tax questions, or would like to get a head-start on your 2020 crypto tax work, feel free to book a free consultation with us here. We are accepting new crypto tax clients and would love to hear from you.