While there are still a lot of questions about the new Infrastructure law's tax requirements for cryptocurrency and investing, the buzz over the requirements brings up another question that has been bubbling around: How does the Internal Revenue Service (IRS) collect payments on virtual assets, like Bitcoin?
The short answer is that it's really not that much different than how the IRS would collect any tax due on any other asset.
The IRS thinks of cryptocurrency (like Bitcoin or any other) as just another kind of property you might own—such as a stock or home or car. Therefore, you need to disclose a gain or loss due to crypto in an IRS tax return, and, as of 2020, the IRS specifically asks about crypto holdings. (Although “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question,” explains the IRS.)
At the same time, the IRS is also notified by others that you've made related crypto transactions through filings of 1099-Ks, which must disclose transactions above $20,000, and now, with the new law's 1099-Bs.
And once you've disclosed gains and losses, just like in any other case, you are expected to pay for the taxes due. And keep in mind that the new laws are intended to tighten up compliance and enforcement: Cryptocurrency-related taxes are expected to add $2.8 billion to federal coffers each year.
On the other hand, the IRS still won't take cryptocurrency as a payment method for those due taxes….
HAVING EXPERIENCED TAX COUNSEL MATTERS
Whether you have just bought your first cryptocoin or you've made a fortune in mining for Ethereum, crypto is a new world of currency, and that will raise a host of new questions about tax compliance. That's why it is important to start talking to qualified tax counsel—to understand your potential liability and get answers to all those other questions. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.