IRS Clarifies Cryptocurrency Investment Reporting Requirements

Crypto purchases made with fiat do not need to be declared in Form 1040.

The United States tax department, Internal Revenue Service (IRS), has clarified in its FAQs published on Tuesday that American taxpayers do not need not to report cryptocurrency purchases made with fiats.

The taxpayers need to declare on Form 1040 if they have made any kind of digital currency transactions, whether it is receiving, selling, sending or exchanging. However, they only need to declare if fiat currencies were not involved in those transactions.

“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,” the IRS clarified on the FAQs.

The question on crypto popped up on IRS’s common set of questionnaires in August 2020. Without any clarity on the matter, American crypto investors were left with confusion about the particular question.

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Crypto Gains Will Be Taxed

The non-disclosure of fiat cryptocurrency purchases does not mean there will be tax exemptions on the cryptocurrency gains. In fact, the tax department clarified that any profits from crypto fall under the standard short and long-term capital gains tax.

“If you held the virtual currency for one year or less before selling or exchanging the virtual currency, then you will have a short-term capital gain or loss. If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss,” the taxman added.

The US-based exchanges offering crypto services with US dollar maintain strict know-your-customer (KYC) policy. However, when crypto investors make their investments in overseas exchanges, the tax obligation gets tricky as all the transactions happen in digital currencies.

Meanwhile, the IRS is always vigilant to tax any form of cryptocurrency gains. Over the years, the tax department sent thousands of notices and warning letters to taxpayers who made some form of crypto investments and failed to report. These investors were believed to be from Coinbase, whose identity information was extracted by the tax department.

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