Cryptocurrencies are a hot topic all over the world, especially as the prices of Bitcoin (BTC), Ethereum (ETH) and other cryptocurrencies reach higher thresholds, leading to another big year for investors. While profits look good on paper, there is often one factor that needs to be considered – taxes on cryptocurrencies.
It is not uncommon for traders to take advantage of constant volatility by buying falls, selling on trends and repeating so often. Unfortunately, every transaction is a taxable event, which makes it scary to talk about cryptocurrencies.
The coming breakdown of cryptocurrencies only fuels the need to start a conversation. This campaign is far from new, as the head of the IRS said in 2021 that the country loses trillions of dollars in unpaid taxes each year, largely due to the cryptocurrency market. For this reason, there are currently several lawsuits in the United States against Coinbase, Kraken and Poloniex that require these exchanges to share information with the IRS.
Since then, incidents like this have driven recent IRS announcements of billions of dollars in cryptocurrency seizures that may be related to tax fraud. While some of these tax evasion measures seem exaggerated, especially compared to individuals’ own miscalculations, it is worth noting that it is precisely those activities that deliberately evade taxes that may be affected by the repression imposed.
Cryptocurrency investors and the tax authorities
The tax authorities have acknowledged that more investors are currently participating in the cryptocurrency market than ever before, and this measure is part of the hype and many parts related to how much money the government has set aside for the duration of the COVID-19 pandemic. With more discretionary income in the hands of investors, the number of cryptocurrency traders in the United States has reached an all-time high and continues to grow. According to Grayscale Investments, 55% of US investors own Bitcoin.
Recognizing this, the 2021 version of IRS Form 1040 now asks recipients whether they have received, sold, traded or otherwise disposed of a financial interest through virtual currency at any time during the year. Users must then check the box “Yes” or “No” in response. The IRS also shows its strict campaign by placing this question on the form just below the taxpayer’s name and address, a place you should not miss. The wording is also clarified to indicate that only taxable events, including receipt of cryptocurrencies such as payment, airdrops, exchange of various cryptocurrencies, sale of assets and profits from mining and storage, will be classified as “yes” in updated form.
Consequences of a major dismissal
After checking “yes”, the most difficult step comes to manage cryptocurrencies, which is to find out the balance. The IRS has clarified that cryptocurrencies / virtual currencies are property. As such, users must recognize and report any taxable gain or loss, while avoiding potential audits, interest payments and infrequent penalties in exceptional circumstances. As a result, many have turned to a professional crypto accountant for advice.
In a traditional pre-pandemic year, 15% of employees left one of the four major accounting firms, including Ernst & Young (EY), Deloitte, KPMG and PricewaterhouseCoopers (PwC). Although there is no guarantee that these statistics will remain the same this year, many companies agree that the turnover of employees will be higher than in previous years.
This year, after another year of the pandemic, the profession as a whole has been overworked and underpaid. As a result of the ongoing economic trend called Great Retirement, an estimated 40% of accountants have left the CPA industry, which has resulted in a massive shortage of professionals. Traditionally, as with the laws of supply and demand, the lower the supply, the higher the prices, so it is less likely that the investor will get the tax help he needs.
Of course, even for those who have the means to hire a CPA, it can be difficult to find an assistant with experience in cryptocurrency taxation.
The tax authorities for cryptocurrencies
With fewer resources available, the challenge of paying taxes on cryptocurrencies does not necessarily mean that users have to navigate the complex tax landscape on their own. Instead, the release of new crypto-tax software has made it easier for users to organize their crypto data and calculate their tax liability.