Cryptocurrency and taxes may not be agreed upon in Heaven, but taxes seem inevitable, and tax authorities have made it clear that they persecute people who don’t report. The IRS is sending calls to Coinbase, Kraken, Circle and Poloniex, and taking other compliance measures. The tax authorities sent out 10,000 letters in various versions requesting compliance, but they were all pushing to persuade taxpayers to comply.

The IRS’s hunt for cryptocurrency is often compared to the IRS’s hunt for foreign accounts over a decade ago. Unfortunately, it is not clear if there will be a crypto amnesty program that mimics the offshore voluntary disclosure programs developed by the IRS for offshore accounts.

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The IRS made its first major crypto announcement in a 2014-21 notice, classifying it as proprietary. And this has serious tax consequences, which are exacerbated by sharp fluctuations in prices. Selling cryptocurrency can result in profits or losses and taxation. But even buying something with cryptocurrency can result in taxes. Salaries of employees or contractors as well. Even paying taxes in cryptocurrency can lead to higher taxes.

We’ve already seen crypto audits conducted by the IRS and some states (particularly the California Franchise Tax Administration) and some should follow. At the very least, there are now alternatives to tracking and filing tax returns that can make the process easier than it was in the early days. Everyone is trying to reduce taxable profits from cryptocurrency and defer taxes where possible by law.

However, it is easy to get lost in the tax system and take a tax position that is difficult to defend if caught. With that in mind, here are some of the things I’ve heard I call crypto tax myths.

legend 1
You can only get taxed on cryptocurrency transactions if you have received an IRS Form 1099. If you haven’t received a Form 1099, you can check the box on your tax return that says you have not had any cryptocurrency transactions.

Facts: Tax may still be due even if the payer or broker does not file a 1099 form. Form 1099 does not generate tax unless the tax has been previously collected and Form 1099 does not indicate significant taxable income. Form 1099 may be incorrect, in which case please indicate this on your tax return. However, if you’re under investigation and your best defense is that you chose not to report your transaction because you didn’t receive a 1099 form, it doesn’t matter.

Myth 2.
If you store your cryptocurrency through a private wallet and not on an exchange, you do not need to enter the cryptocurrency on your tax return.

In fact: a private wallet or an exchange, the tax rules are the same. The desire to hide property by shifting wealth into anonymous tenure structures is not new. When Swiss banks began disclosing their US accounts to the IRS and US Department of Justice, many US taxpayers tried just about everything, but in the end, almost everything paid off, usually with high fines. The issuance of cryptocurrency in IRS Form 1040 is not limited to cryptocurrencies that are on exchanges. If you say no, even if you store cryptocurrency through a private wallet, you are likely to make false statements on your tax return signed under the threat of perjury. You can bet you’ll never get caught, but thousands of American taxpayers with Swiss bank accounts can confirm how weak that bet is.

Myth 3.
If you hold cryptocurrency through a trust, LLC, or other legal entity, you do not have to pay tax on cryptocurrency transactions and do not report. Also (the myth continues), income earned through an LLC is not taxed.

In fact: Owning a cryptocurrency through a legal entity can withhold income from your tax return. However, if a company does not qualify (and is not registered) as a tax-exempt company, it will likely have an obligation to prepare tax reports and may have tax arrears. For tax purposes, LLCs are taxed as corporations or partnerships, depending on the tax facts and choices. LLCs are not considered individual members, so the income of the LLC ends with the income of the sole proprietor. If your legal entity is a foreign legal entity, there are complex tax rules in the United States that can make you directly liable for certain income earned in a foreign legal entity.

Myth 4.
If I arrange to sell my cryptocurrency as a loan (or other non-sale transaction), I don’t have to report revenue.

Source: CoinTelegraph

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