Crypto Tax Regulations United States

IRS Guidance On Cryptocurrency For 2021

With little IRS guidance and a bit more padding, as the tax deadline has been extended to 17th of May, be prepared for the IRS to pull out all its scare tactics before the big day.  

You’ve seen the headlines. Tax evasion arrests, special task forces being assembled, and seemingly every reason under the sun to run screaming from the IRS.  

We are here to tell you not to be distracted by the smoke and mirrors of the new FAQ that creates more questions than answers when it comes to your crypto tax return.  

Today we will set you straight and assemble the best IRS guidance to follow on cryptocurrency for 2021.  

Related Reading: How Should I Answer The Virtual Currency Question On Form 1040?

What IRS Guidance Do We Have For The Reporting Of Crypto?

Back in the beginning of crypto time, relating to the IRS, Notice 2014-21 was released providing the very first Virtual Currency Guidance.

This notice defined virtual currencies as convertible virtual currencies, which characterized cryptocurrencies. Notice 2014-21 originally came out in April 2014. 

From there, several FAQs accompanied this notice with references to various publications like: “Taxable and Nontaxable Income,” “Basis of Assets,” “Withholding of Tax on Nonresident Aliens and Foreign Entities,” and more.

Further guidance came out in October 2019 in IRS Notice 2019 -24, focusing on Airdrops and Hardforks, and the IRS also published an FAQ on Virtual Currency.   

Related Reading: Crypto Tax Expert details IRS Cryptocurrency Timeline

What Is The Hierarchy Of The IRS Guidance? 

It’s important to understand that there is a hierarchy of authority in the things that the IRS says.

  1. The highest level of the hierarchy is the law itself written by Congress. 
  2. The second highest priority is the official IRS regulations.
  3. The next level is a series of sources like the IRS General Counsel Memoranda, IRS Technical Memoranda, and notices that do not have the force of the law or the regulations but are intended to guide the taxpayer.
  4. Below that, we have web pages, instructions for forms, FAQs like Question #5 which was recently updated, news bulletins, and any other document generated by the IRS, which are merely informative and non-binding.

IRS Guidance For Every Taxpayer

Every taxpayer’s situation is unique.

Which means that the FAQs that have been published by the IRS raise as many questions as they answer.

The truth is that many people feel that they don’t have to do something until the IRS provides guidance on it. 

And this is not the case. 

That’s like saying, “I don’t have to obey the speed limit until the policeman tells me that this is the speed I have to go.”

The law is the law, and we must obey it. 

When Congress passes a law, the taxpayer doesn’t have the luxury to decide which ones they want to obey.

Taxpayers must obey the law regardless of what the IRS says.  

Why Is IRS Guidance Moving So Slowly?

The first thing to note here is that FinTech 2.0 is revolutionizing both the financial industry and the tax industry at the same time by placing power in the hands of the customer. 

And at the same time, the US has a national priority to globally have the most attractive financial system.

The US wants people worldwide to invest in the US banks and the US stock markets.

Consequently, the IRS has intentionally chosen to move slowly to regulate the crypto marketplace because it is so dynamic and rapidly evolving. 

People want the IRS to explain how to do taxes on edgy things like DeFi and rebasing of coins…

But, we should all be grateful that the IRS has intentionally taken its time to allow this complex marketplace time to stabilize before they heavily regulate it.  

Poorly conceived regulation (or guidance) could severely cripple innovation and American leadership in the crypto industry. 

An example of this has been letters from influential members of Congress asking the IRS not to restrict the taxation on staking and other activities. 

In the end, it’s Congress who has asked the IRS to take a go-slow approach.

What Can Taxpayers Take Away From This IRS Guidance On Cryptocurrency?

  1. Every time you sell crypto for USD, the gain is taxable.
  2. When you exchange one cryptocurrency for another cryptocurrency, the gain of the first currency is taxable. 
  3. If you sell or exchange the cryptocurrency and (instead of a gain), you experience a loss. And at the end of the year, you are taxed on your net gain (which is your gain minus your losses).
  4. Other types of income are taxed as ordinary income, such as mining, staking rewards, interest from lending, airdrops, and hard forks.
  5. Many DeFi transactions represent complex financial transactions that are difficult to represent in the tax code. So if you invested in DeFi, it’s going to be complicated.

In 2020, the IRS made significant increases in the enforcement of cryptocurrency tax collection. 

In 2021, Form 1040, puts the virtual currency question right up there before you can say how much your wages are. 

Related Reading: Crypto Owners Terrified Of New 1040 Tax Question

That message is loud and clear that the IRS is taking a very aggressive position on cryptocurrency reporting.

The average taxpayer should take a serious report of all of their income.

This advice comes to you from Clinton Donnelly, the CryptoTaxFixer, founder of CryptoTaxAudit and Donnelly Tax Law.

Related Reading: 3 Reasons Why Crypto Traders Should Have Crypto Tax Audit Defense is the leading firm defending crypto owners being audited on their cryptocurrency. Become a member today.  

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