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The IRS has issued a warning about how to answer a cryptocurrency question on the first page of your tax return.
You will need to respond to a yes or no question about virtual currency, regardless of whether you are “engaging in a transaction” in 2021, According to the agency.
A wrong response could signal your return, said Tommy Lucas, a certified financial planner and registered agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
The question reads: “At any time during 2021 did you receive, sell, exchange or otherwise dispose of any Virtual Currency?”
You can respond in the negative if you buy cryptocurrency and hold it in US dollars, or transfer digital assets between your wallets.
However, you will need to say yes if you have sold cryptocurrency, exchanged one virtual currency for another, used it for purchases, received it as payment, or acquired it through mining or betting and more.
Explaining how the mismatch could lead to a manual IRS audit, Lucas said,
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There may be bigger problems if you have a taxable business and you answer “no,” experts say.
“Here comes the hammer because they can say you lied about a government document under penalty of perjury,” said Ryan Lucy, a Richmond-based Virginia-based CPA and executive vice president of accounting firm PIASCIK.
If you are not clear about reporting, you can seek guidance from a tax professional with experience in coding. But it could become more difficult as the April 18 deadline approaches.
Cryptocurrency may be subject to capital gains when exchanged or sold at a profit. Lucy explained that exchanging digital currencies, exchanging cash for US dollars, or even making a purchase may be taxable events.
The profit or loss is the difference between the purchase price, known as the basis, and the value when you sell or exchange, and your tax rates depend on the length of the holding.
If you’ve held digital assets for more than a year, you may qualify for long-term capital gain rates of 0%, 15%, or 20%, depending on your taxable income.
However, many cryptocurrency investors are selling or exchanging frequently, according to CNBC مسح Surveyresulting in short-term capital gains, are levied at ordinary income tax rates, up to 37% for higher-income earners.
What’s worse, find out your basis for Calculate your crypto tax bill It may not be easy with limited reporting from cryptocurrency exchanges.
If you do not report taxable crypto activity and face an IRS scrutiny, you could face benefits, penalties, or even criminal charges.
It could be considered tax evasion or fraud, said David Canedo, a Milwaukee-based certified public accountant and tax product manager at Accointing, a crypto-tracking and tax reporting tool.
While the chances of an IRS scrutiny are lower due to the agency’s limited hiring, officials may be seeking larger amounts of money, he said.
For example, there is a big difference between buying bitcoin in 2012 and withdrawing millions of dollars in 2021 for small trades in exchange for $100 profit, Canedo said. But you have to reveal everything regardless.
He said, “You’re playing with fire if you don’t report it.”
Canedo said that although the IRS has a three-year review of errors, there is no statute of limitations for fraud.
Another danger is the whistleblower, who can Report a missing activity Losi said from PIASCIK to the IRS in return for a percentage of the penalties collected.
“The first way the IRS finds out about tax fraud is by a former business partner or ex-spouse,” he said.
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