IRS Updates Crypto Tax Forms & Rules for FY 2021-22 – BearTax

This blog post is a documentation of all the updates proposed by the IRS and the Biden administration regarding crypto tax forms and rules for the 2021-22 tax year.

The development of new products on the CeFi & DeFi blockchain protocols constitutes multiple taxable transaction scenarios. But taxes on cryptocurrency activities have been in a very gray area for years.

Tax rules are still evolving and constantly changing. Many taxpayers are either not familiar with the taxable events in the crypto world, or do not know how the profit/loss on taxable activities is calculated. While some of them end up not reporting their crypto income, some don’t even.

the main points

Internal Revenue Service (IRS) Chief Charles Rettig says the US loses about $1 trillion annually in unpaid taxes, and he attributes this growing tax gap, at least in part, to the rise of the cryptocurrency market.

Therefore, in order to obtain accurate information about the taxpayer’s crypto activities and make it more tax compliant, the IRS takes several actions:

  1. Modified coding question language for tax form 1040
  2. Proposal for New Tax Reporting Requirements for Cryptocurrencies
  3. A note to clarify that cryptocurrency swaps are not tax deductible

Let’s go through them one by one!

Revised Language for Coding Questions on IRS Tax “Form 1040” for FY 2021-22

in a tax year 2019The IRS asked taxpayers if they had ever dealt in cryptocurrency for the first time.

Problem: The IRS asked the question on the “Schedule 1” form. But, not everyone submits this form. Schedule 1 is typically used to report income not on Form 1040. For example: income from capital gains, alimony, or gambling gains.

in a tax year 2020, the IRS moved the question from “Schedule 1” to “Form 1040.” Because all US taxpayers use Form 1040 to file tax returns. The question is almost impossible to miss because it is placed right after the personal details.

Problem: The question stated, “At any time during 2020, have you received, sold,send“exchange or otherwise”gained, gained“Any financial interest in any virtual currency?”

However, “sending” or “receiving” cryptocurrencies is not subject to tax. The question can be viewed in another way and creates confusion among taxpayers.

2020 IRS 1040 Tax Form Question

to tax year 2021, the IRS has modified the question in a draft version of Form 1040:

“At what time during 2021 do you receive, sell, exchange, etc. Get rid of any financial interest With a virtual currency? “

  • The word “send” has been removed.
  • Replace ‘Any financial interest obtained’ with ‘Any financial interest given away’

This means that you don’t have to select ‘yes’ if you are ‘sending’ or ‘getting’ crypto between wallets/exchanges. Both are non-taxable transactions.

2021 Draft copy of IRS 1040 tax form

Before completion, the “Form 1040 for tax year 2021” will undergo several revisions. Follow us Twitter To stay informed!

Biden’s new tax reporting proposals

The new US Treasury “green book” Released in May. The Green Book is a comprehensive guide to government department revenue proposals for fiscal year 2022.

The Biden administration has made the following proposals for crypto tax reporting requirements:

  • Companies Must Report Crypto Transactions Worth $10,000+
  • Raise the tax rate on long-term capital gains to 43.4%
  • Cryptocurrency custodians and exchanges must report account data for users who make at least $600 in total inflows/outflows each year.

Cryptocurrency swaps are not tax deductible:

In the United States, crypto assets are considered “property,” and a “capital gains tax” must be paid for gains made on crypto assets.

Section 1031 of the Internal Revenue Code allows taxpayers to defer tax on “exchange of similar property.” For example, if you are going to exchange or exchange one type of gold coin for another type of gold coin, you can defer exchange taxes.

Prior to December 31, 2017, “similar property” refers to any property held for commercial or investment purposes, including “real estate, art, equipment, stock in trade, securities, trusts, partnerships, and interests.” benefit”. After December 31, 2017, real estate intended for business or investment purposes only is considered “property of the same kind” under Section 1031.

Taxpayers questioned if exchange One cipher origin with another cipher origin It can also be considered an “exchange of a similar type” under Section 1031 prior to December 31, 2017. For example: buying Ethereum with Bitcoin. Because before this date a ‘property like type’ can be any ‘property’.

In response, the IRS issued a memo in June, which clarified that exchanges between (1) Bitcoin and Ethereum, (2) Bitcoin & Litecoin, and (3) Ethereum & Litecoin, are ineligible for an exchange of a similar type in Section 1031 of the Code. Because each cryptocurrency runs on its own blockchain network and has different use cases. Therefore, swaps between cryptocurrencies were taxable even before 2018.

A link has been issued to the issued IRS memo

Simple Guide to Crypto Taxes

Confused about crypto taxes? Our blog – The Simple Guide to Crypto Taxes – can clear all your questions:

  • What crypto activities are taxable?
  • What crypto activities are tax deductible?
  • How are crypto taxes calculated?
  • What shapes should be used?
  • How do you save on crypto taxes?

We will update this blog post when changes occur. To receive regular updates, follow us on Twitter !

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