If you simply bought crypto in 2020, you probably don't owe money to Uncle Sam. But for other transactions dealing with digital currency, you might be in for a tax bill this season, according to one expert.
"Any sale or exchange where you're trading one cryptocurrency for another is also a taxable event," Michael Meisler, EY America’s Cryptocurrency Tax Center of Excellence leader told Yahoo Finance Live (video above). "For those that mine bitcoin, for example — merely mining it and receiving an award or reward — is considered a taxable event."
While the IRS and Treasury have issued limited guidance on how cryptocurrencies are taxed, virtual currencies are considered capital assets by the IRS and should be treated as property.
Any losses or gains should be declared on your Form 1040 and are therefore taxed as capital gains or losses. Income generated from mining cryptocurrencies is also taxable and should be included in your return.
On top of Form 1040, taxpayers have to declare whether they have received, sold, sent, exchanged, or otherwise acquired any financial interest in a cryptocurrency. An incorrect response to the yes or no question may get you in trouble with the IRS.
What can make your tax returns even more complicated is if you've used bitcoin as payment for goods.
"As companies are starting to accept cryptocurrency as payment for goods," Meisler noted, "just buying that asset will require that taxpayers calculate their gain or loss on the cryptocurrency that they're using."
For example, if you decide to buy a Tesla (TSLA) vehicle (the company announced that such an option would be available this year) or something else with bitcoin as a form of payment, you must convert the crypto currency into dollars by selling the asset, which is a taxable event. Additionally, the simple act of exchanging one crypto asset for another is also considered a taxable event.
The IRS has launched more initiatives to monitor the reporting of cryptocurrencies, including the recent 'Operation Hidden Treasure' that targets taxpayers who try to conceal virtual currency income from their returns.
"The blockchain that these cryptocurrencies trade on may not show the name of the individuals trading, but it shows wallets and addresses," Meisler said. "The IRS can find the people behind them if they work hard enough at it."