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Crypto taxes 2020: Understanding the IRS new guides and letters

Updated: Nov 16, 2021

CoinTracking.info helps traders figure out their crypto taxes since 2011, before the IRS released its first statements about cryptocurrency, and now we do it for 2020. That guidance established the basic ground rules, but various cryptocurrency-specific questions still remained and the IRS maintained its relatively hands-off approach to the nascent industry.

Last year, the IRS released new crypto taxes guidance for the first time since 2014. In addition, it started sending out warning letters to some crypto traders. Keep reading for an overview of the IRS’s 2020 crypto taxes guidelines and new communication strategy.


New IRS guidance for Crypto Taxes in 2020

The IRS made headlines in October when it announced new crypto tax guidance for the first time since 2014. To find out what the new guidance means for tax payers, CoinTracking contacted Vincenzo Villamena of Global Expat Advisors, a boutique CPA firm specializing in tax preparation for entrepreneurs and US expats.


Airdrops

“When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the ledger.”

Permission for alternative cost basis accounting methods

“The most important clarification is in regards to the methodology to calculate capital gains on crypto, opening up the opportunity to use LIFO and specific identification method, along with FIFO which was widely considered the standard (and usually the most conservative methodology). Given these developments, many tax filers for 2019 have changed their methodology calculation (or at least compared the different options) in order to optimize their capital gains taxes. Furthermore, we see taxpayers amending prior year returns in order to get refunds based on the fact that if they were tracking their crypto using another method (such as specific identification), then they don’t necessarily have to use FIFO and hence have changed the methods.”

Need for clarification on some issues

“Another thing to remember is that Like Kind Exchange (which was the ability to defer capital gains when you exchange one like asset for another, such as bitcoin for alt coins) was eliminated for everything except real estate starting in 2018 and the IRS never clarified whether crypto can be considered Like Kind.”

Related: IRS Issues Cryptocurrency Tax Guidance – Here’s What It Means


2020: Understanding crypto taxes forms, the “crypto question” and warning letters


Form 8949

As is the case with previous tax years, IRS form 8949 (Sales and Other Dispositions of Capital Assets), is the main form for reporting crypto transactions. You can use CoinTracking to fill in this form automatically, once you’ve imported your tax data into your CoinTracking account.


1099-K

If you accumulated $20,000 worth of proceeds and have 200 trades or more, you may have received a 1099-K form from your exchange. If your tax return doesn’t agree with the information in this form, that may put you in the IRS’s cross-hairs. The same information that you receive on your 1099-K, the IRS also receives it.


Warning letters

In 2019, the IRS started sending out warning letters to crypto traders that hadn’t filed or filed improperly.

Maksym Babych, MBA, Ph.D candidate and CEO at SpdLoad, provided this overview of how the IRS communicates with traders that it views to be non-compliant:

“In July 2019, the IRS sent out warning letters. These letters came out in 3 variations: Letter 6173, 6174 & 6174-A. Letter 6173 warned of further examination if the recipient failed to respond, even though many had actually correctly filed their taxes. Letter 6174 & 6174-A alerted taxpayers how cryptocurrency-related transactions should be reported.”
“In addition to these letters, throughout 2019, the IRS has been sending out CP2000 letters. These letters were automatically generated when there was a mismatch between what’s reported on Form 1099-K by the crypto exchange and what’s reported on the tax return by the taxpayer. The IRS announced that it plans to ask every American taxpayer on Form 1040 Schedule 1 “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This so called “crypto question” is designed to improve voluntary compliance and gather more data about US cryptocurrency holders.”

Form 1040’s new “crypto question”

The “crypto question” sparked controversy within some corners of the cryptocurrency community. For example, Patrick Devereux, CFO of Illumnine and Deverereaux Consulting, has stated that he will not check the box.

“What has been and continues to be the largest issue for taxing cryptocurrency is tabulating correct gains for sales, fees, and starting [cost] basis. Personally, my biggest issue is reporting if there is crypto activity, even if there isn’t a sale. My firm will not answer that question on the return, unless there is actually a reportable transaction, such as a sale, or a crypto to crypto exchange. Simply getting and holding crypto is none of the government’s business and I refuse to help the government collect metadata on people in this space, unless I am legally obligated to.”

Filing your crypto taxes in 2020: first steps

One of the most time-consuming aspects of filing your crypto taxes is gathering all your trading data. CoinTracking automates this part of the filing process, but there are a few other steps that are required after you import all your transactions.

Sign-up to CoinTracking today!


Laurence Padilla, veteran currency trader and Head of Research at The Tokenist, explains the filing process in the following way:

“When you look at doing your crypto taxes this year, there are a number of things you need to do. The first step being acceptance that you need to report your crypto activity. Once you have done this, get started on collecting your data, use an identification and calculation method which suits you best, find out which tax form is applicable to you, and file before the deadlines in order to avoid penalties. Getting each of these steps right is crucial in getting the best outcome from doing your crypto taxes. If you are still confused after researching and looking into the various different options you have and which ones are best suited for your situation, the best thing you can do is consult with a tax professional. They will help you get it all right.”

A list of tax professionals that specialize in cryptocurrency and use CoinTracking can be found here.

Related: Crypto Taxes in the United States: Everything You Need to Know


Clarify your crypto tax doubts with our weekly content:

  1. 2021’s NFT guide (with taxes).

  2. Is Bitcoin taxable? The ultimate guide for 2021 taxes.

  3. Is transferring Crypto between wallets a taxable event?

  4. 5 ways a Blockchain fork impacts your Crypto taxes.

  5. Receiving a free airdrop? Watch out for taxes.

  6. Bitcoin Millionaire? An inheritance plan for wealth.. with taxes.

  7. Do you pay taxes on crypto trades?

  8. How to report crypto in your taxes?

  9. The tax guide to crypto loans.

  10. Earn Interest on Crypto: The Taxes Guide.

  11. Do you pay taxes when spending crypto on products?

  12. Do you pay taxes on Bitcoin debit cards purchases?

  13. How to calculate taxes with Bitcoin dollar-cost averaging?

  14. Tax implications of buying a Tesla with Bitcoin.

  15. How Crypto tax laws save money for Bitcoin hodlers

Fill your crypto taxes with CoinTracking:

  1. Importing (API & CSV) trades from 100+ exchanges/wallets.

  2. DeFi/DEX trades imports (e.g., Uniswap) using our ETH+DEX import.

  3. Support for Binance Smart Chain and Binance Chain trades.

  4. 25+ advanced reports.

  5. Automatic Gains calculations according to 12 accounting methods (e.g., FIFO, LIFO, HMRC).

  6. Tax Reports compliant in your country.

If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service. CT Full Service is provided by a team of crypto tax professionals led by Sharon Yip, an expert CPA. Follow our weekly AMAs on Twitter where Sharon Yip answers your crypto tax questions.


Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.


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