How to file taxes on crypto for US owners?

Key takeaways:

  • The US IRS updated its tax requirements at the end of 2020.
  • US citizens must disclose their crypto activities in Form 1040.
  • Taxes must be filed no later than April 15, 2021.

The US Internal Revenue Service (IRS) published1 new guidelines on how to file taxes on crypto at the end of last year. US citizens must disclose information about their crypto activities in Form 10402. In the related FAQ3, the IRS explains that virtual currency (VC) is treated as property for tax purposes and that “general tax principles applicable to property transactions” apply to VC transactions.

New instructions from the IRS answered questions from crypto investors and holders. 

What’s important to know:

At the top of Form 1040, for the question “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”, US taxpayers must check the “yes” box if they:

  • Received or transferred VC for free (including airdrops and hardforks);
  • Exchanged VC for goods or services;
  • Exchanged VC for another property including another VC;
  • Disposed of financial interest in VC

Screenshot of Form 1040 containing the yes/no question about virtual currency

Besides, the IRS instructions also read: “A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control.” This means that VC holdings or VC transactions between your own wallets should not be considered in this question. The IRS also specified in its FAQ on VC transactions that if an individual bought cryptocurrencies with US dollars, he/she must not answer “yes” in the question on page 14.

If US taxpayers dispose of VC “held as a capital asset through a sale, exchange, or transfer”, capital gains or losses should be determined with Form 89495. Capital gains or losses should then be reported on Form 1040, Schedule D.

Mining earnings are also taxable and are included in gross income at the market value in the US dollar at the time of receipt.

Taxes for Form 1040 must be filed by April 15, 2021. If US taxpayers miss the deadline, they may be subject to penalties.

Moreover, it seems that the US wants to focus on unreported crypto income. Last month, Damon Rowe, the Director of the Office of Fraud Enforcement at the IRS announced the “Operation Hidden Treasure” that is focused on unreported crypto income as told by Forbes. This operation consists of tracking unreported crypto income from US taxpayers.

On the same note, on April 1st, a Massachusetts federal court6 authorized the IRS to perform John Doe summons on Circle and its associated entities, including Poloniex. The aim is to collect information on US individuals who conducted transactions amounting to at least $20,000 in cryptocurrency between 2016 and 2020 to check that they are meeting tax requirements.

The US government is implementing processes to trace and analyze crypto transactions in an effort to uncover unreported crypto income. Scorechain also provides tools that can be used to trace cryptocurrencies and to analyze wallets and transactions. Do you want to learn more about the solution? Contact us for a free demo:  

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a European leader in crypto compliance since 2015, the Luxembourgish company serves worldwide customers in 33 different countries with more than 150 licenses established, ranging from cryptocurrency businesses to financial institutions with crypto trading, custody branch, digital assets customers onboarding, audit and law firms and some LEAs.

Scorechain solution supports Bitcoin analytics with Lightning Network, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger and Tezos. The software is able to de-anonymize the Blockchain data and connect with sanction lists in order to provide a risk scoring on digital assets transactions, addresses and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation can report suspicious activity to authorities with enhanced due diligence.