Cryptocurrencies

Selling, exchanging, or using cryptocurrency triggers capital gains and losses for traders.

The IRS treats cryptocurrencies as intangible property, not a security or a commodity.

The realization method applies to short-term vs. long-term capital gains and losses. If you invested in cryptocurrencies and sold, exchanged, or spent some during the year, you have to report a capital gain or loss on each transaction. Include cryptocurrency-to-currency sales, crypto-to-alt-crypto trades, and purchases of goods or services using crypto.

U.S. cryptocurrency exchanges issue a Form 1099-K to accounts with transactions over a certain threshold. The problem for the IRS is that many cryptocurrency transactions on exchanges around the world are not evident for tax reporting. Cryptocurrency investors should download all crypto transactions into a crypto accounting program that is IRS-compliant.

Wash sales do not apply to intangible property. Use the first-in-first-out (FIFO) accounting method. Intangible property should use the specific identification method, but that requires broker confirmation of each trade, which is not possible.

TCJA restricted Section 1031 like-kind exchanges to real property, starting in 2018. That rules out using like-kind exchange on crypto-to-crypto trades (i.e., Bitcoin for Ethereum). It’s questionable whether crypto traders could have used Section 1031 before 2018 to defer capital gains taxes.

The IRS recently mailed tax “education” notices to thousands of crypto traders and released a new set of FAQs about hard forks, airdrops, and other open questions.

The IRS asks a new question about cryptocurrencies on top of the 2019 Schedule 1 supporting Form 1040: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Yes or No.