Cryptocurrency purchases made in fiat currencies should not topic to any kind of IRS tax reporting in keeping with the IRS FAQs on cryptocurrency (Q5) up to date as of March 2, 2021.
For instance, say Sam bought 1 bitcoin (BTC) in 2020 for $1,000 and held it all year long. In accordance with the up to date FAQ-Q5, Sam isn’t required to verify “sure” on the notorious digital foreign money query showing on the entrance of Type 1040 – “At any time throughout 2020, did you obtain, promote, ship, alternate, or in any other case purchase any monetary curiosity in any digital foreign money?”. Sam can safely reply “No” on the query.
Previous to this up to date steerage from the IRS, taxpayers have been confused whether or not buying cryptocurrency in USD would require them to verify “sure” on the digital foreign money query. Given the limited IRS instructions on how one can reply this query, some taxpayers checked “sure” even once they bought cryptocurrency utilizing USD, assuming they acquired a “monetary curiosity” in digital foreign money.
This added steerage from the IRS offers extra readability to taxpayers when answering this query going ahead. Additional, privacy-focused crypto customers would respect that they don’t should disclose their involvement with cryptocurrency to the IRS needlessly.
It must be highlighted that FAQ-Q5 solely applies to cryptocurrency bought in fiat. If you are going to buy a cryptocurrency utilizing one other cryptocurrency, you would need to verify “sure” on the Type 1040 query. This might additionally set off a taxable occasion for you.
Disclaimer: This put up is informational solely and isn’t meant as tax recommendation. For tax recommendation, please seek the advice of a tax skilled.