All this went wrong in the debut of bitcoin in El Salvador 1:11
(CNN) -
El Salvador's adoption of bitcoin as legal tender may have been a watershed moment for cryptocurrencies.
But in the United States, although you can use cryptocurrency to buy and sell products or services, don't think for a minute that it's like cash, at least if you want to avoid problems with the US Internal Revenue Service (IRS). , for its acronym in English).
Virtual currencies are taxed as property or as an investment when you sell them.
To make things more confusing, using them to buy something technically counts as a sale.
If you get paid in bitcoins or other cryptocurrencies, on the other hand, that will be treated as taxable income for you.
In fact, almost all transactions can be taxable and must be reported.
While bitcoin and other cryptocurrencies can be virtual, they have very real tax consequences.
If you do not pay the taxes you owe, you will be subject to interest and penalties and, in some circumstances, even criminal prosecution.
So if you couldn't resist taking part in, say, bitcoin's wild ride - which was up 437% last year alone, at one point trading above $ 60,000 and falling below $ 43,000 this week - - keep good records, because you are responsible for keeping the documentation of each of your transactions.
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The price of bitcoin plummets the day El Salvador puts the cryptocurrency on course.
It could be a warning for other countries
Are cryptocurrency transactions reported to the IRS?
There are no legally required third party reporting on encryption transactions or many types of encryption payments.
But that may change soon if the Infrastructure Employment and Investment Law is enacted.
If enacted, exchange sites like Coinbase would have to report their trades.
The bill has been approved by the Senate and awaits a vote in the House this month.
In the meantime, and especially if the bill is not enacted, there are a variety of ways the IRS will assess whether you have transacted taxable crypto.
For example, any business that pays more than $ 600 to a non-employee or pays wages to an employee must report that income to the IRS, said Mark Luscombe, chief federal tax analyst at Wolters Kluwer Tax & Accounting.
Additionally, all federal taxpayers at the top of their 1040 form must honestly answer a question about whether they received, sold, sent, exchanged, or acquired any financial interest in any virtual currency during the tax year.
That does not mean that the IRS will simply rely on an honor system.
"They have the perception that there are far more people involved in virtual currency transactions than the returns are reported," Luscombe said.
So, in conjunction with the US Department of Justice, the tax agency actively seeks compliance in a number of ways.
A "virtual currency compliance campaign" has started which will include public outreach but also "reviews".
That can mean audits.
Additionally, the IRS sent letters in the summer of 2019 to 10,000 people alerting them to their tax obligations regarding virtual currencies and urging them to review and amend past returns if they owe back taxes, interest, and penalties.
Why is the international financial community distrustful of the use of bitcoin in El Salvador?
How did you get the names of those 10,000 people?
"[A] through several ongoing IRS compliance efforts," the agency noted.
One such effort: The IRS is looking for customer lists of cryptocurrency companies through subpoenas.
"The Justice Department will continue to work with the IRS to ensure that cryptocurrency owners pay their fair share of taxes," the Justice Department said in a statement in April.
The IRS also has a Criminal Investigation Cyber Crimes Unit, charged with quelling illegal activity in virtual currency transactions.
What tax do I owe if I sold cryptocurrencies?
You must report any capital gains or losses from the sale.
That will be determined by the difference, in US dollars, between what you paid for the cryptocurrencies and what you received when you sold them.
If you held the investment for less than a year and it had increased in value when you sold it, the gain will be taxed as common income.
Instead, if you held the investment for more than a year, it will be subject to capital gain tax rates.
If you lost money on the sale, you can use that capital loss to offset any capital gains you've made from other investments, Luscombe said.
What if I was paid in virtual currency for a good or service?
That is reported as common income.
And the reported income amount should be the US dollar value of the virtual currency on the day you received it.
Differences between cryptocurrencies: bitcoin, dogecoin, ethereum and binance coin
What if I pay someone else in a virtual currency like bitcoin?
That is like a bitcoin sale where you are going to make a profit or a loss.
The IRS explains that the gain or loss is determined by "the difference between the fair market value of the services you received and its adjusted basis in the virtual currency exchanged."
If all I did was buy virtual currencies, what should I report?
In that case you should not report it on your tax return, according to the IRS, in the same way that you would not report an investment that you bought and that you have in a brokerage account, unless it produces taxable income such as dividends or interest.
Will the state in which I live tax my cryptocurrency transactions?
Probably, but you should see what the state department of revenue had to say on the subject.
"Most states have not specifically addressed virtual currencies, which means that most states that have an income tax would follow the federal lead," Luscombe said.
Any money you earn from your cryptocurrency investments or income payments will be included in your federal adjusted gross income, which most states use as a starting point.
Two states - Nevada and Wyoming, which do not have an income tax - specified that they will not subject virtual currency transactions to state property tax, Luscombe said.
(To learn more about these and other questions, the IRS created this FAQ. If your situation is particularly complex, it may be helpful to consult a tax professional who has experience in this area.)
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