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How cryptocurrency can affect your taxes

On Behalf of | Apr 27, 2021 | Tax Law

If you live in Arkansas and you buy or sell bitcoin or another cryptocurrency, you need to think about the impact on your taxes. The federal government does not view cryptocurrency as cash but as property for tax filing purposes.

Figuring out your taxes

Under federal tax law, if you sold cryptocurrency in 2020, you had it for less than a year, and you made money on the sale, it will be taxed as regular income. If you had it for more than a year and sold it for a profit, you will have to pay capital gains tax. If you lost money selling your cryptocurrency but made money selling other investments, you can use the cryptocurrency capital loss against the capital gains from other sales. If you simply purchased cryptocurrency but you did nothing else with it, you do not have to report it since it is simply an investment. If someone paid you in bitcoin or other cryptocurrency for goods or services, you should report it as ordinary income based on its value the day you were paid. Gifts of cryptocurrency do not have to be reported until you sell them.

Government tracking of cryptocurrency

You might assume that cryptocurrency transactions can be hidden from the government, but this would be a mistake The IRS is working from an assumption that there is a significant amount of cryptocurrency trading happening that is unreported and has taken steps to try to track it. While third parties are not required to report transactions, the government can use legal summons to get information from cryptocurrency companies. You could also be audited.

Dealing with the IRS can be stressful. People often feel at a disadvantage because tax law is so complex. If you are concerned about cryptocurrency or other tax issues, you may want to hire an attorney to negotiate with the IRS on your behalf and explain any issues to you.