It's the first week of April, and suddenly, you realize that you only have two weeks left to file taxes on time. While trying to pull everything together, you realize that you're not going to make it on time and decide to file for a six month extension. You pay what you think that you'll owe and forget about taxes for another six months. Well, the time’s up!The October 15th extended tax deadline is fast approaching — it's time to buckle down and figure out what you owe. If you're struggling to account for cryptocurrency transactions, it's important to take the time to get it right. The IRS has made it clear that cryptocurrency gains are subject to taxation and they've actively pursued those that haven’t paid.Let's take a look at IRS cryptocurrency guidance, what happens if you don't (or can't) pay and how ZenLedger can help make the entire process a lot easier.
The October 15 extended tax deadline is quickly approaching — have you figured out your Crypto Taxes and Accounting?
What Is the IRS' Guidance?
The IRS issued its first and only guidance on cryptocurrencies in Notice 2014-21 in 2014. While the notice addresses many different questions, the most significant guidance is that virtual currencies are treated as property when it comes to income tax. Anyone buying and selling cryptocurrencies must pay taxes as if they were a stock rather than a foreign currency.The good news is that the IRS is expected to issue updated guidance in the near-term. Congress sent a letter to the IRS in September 2018 requesting more information about how to treat virtual currencies for tax purposes, including how to account for forks and airdrops. They sent a second follow up letter in April 2019 requesting expedited guidance.In the meantime, there have been some hints about the IRS' view on cryptocurrencies. The agency recently sent three form letters to about 10,000 crypto traders and asked them to verify that they correctly filed taxes due on crypto gains and losses. These letters provide insights into how the agency expects traders and investors to report their gains or losses.Some of the biggest insights from the letters included:
- Traders must calculate the cost basis using the exact date and time of the transaction rather than using a "reasonable manner" in calculating an appropriate exchange rate.
- Exchanges may be required to provide a 1099-B, the form for securities transactions, rather than the 1099-K, the form for payment processing, that they've used in the past.
Some of the key remaining questions include:
- How should the forks be treated when new cryptocurrencies are given to existing holders?
- How are airdrops handled when a wallet provider or other service sends tokens to all users?
The answers to these questions could have a significant impact on the tax treatment of cryptocurrencies. In the meantime, if you need help preparing your taxes, it's never a bad idea to consult an accountant to follow best practices.
What Happens If You Don't Pay?
The IRS requires that you report the gain and loss on each cryptocurrency transaction or any cryptocurrency earnings — even if there's no gain/loss or the loss isn't material.[content_upgrade cu_id="676"]Download our Checklist of the Common Crypto Tax Mistakes and learn how to avoid them on your returns.[content_upgrade_button]Click Here[/content_upgrade_button][/content_upgrade]There are several possible outcomes if you don't claim these gains or losses. The maximum penalty for taxpayers that knowingly file a false tax return is three years in prison and a $250,000 fine. If you made an honest mistake, the IRS will charge you penalties and interest on unpaid amounts, which can add up to significant amounts over time.While cryptocurrencies were designed to be pseudo-anonymous, there are many ways for the IRS to figure out that you made money in cryptocurrencies. Many exchanges file Form 1099-K or 1099-B for customers that transact more than $20,000 per year, which makes it easy for the IRS to see what you owe. Audits can easily trigger a look into cryptocurrency holdings.
What Happens If You Can't Pay?
The IRS provides several options for taxpayers that can't afford to pay the tax that they owe. In many cases, it's safer to work out a plan with the IRS than risk not claiming tax.You can call the IRS at (800) 829-1040 to learn about different payment options. The agency may be able to provide a short-term extension, installment agreement or offer in compromise. In some cases, they may also delay collection by reporting the amount as non-collectable until you are able to pay or waive penalties in some cases (although interest charges remain).If you owe a lot of money, you might contact an accountant or attorney to explore other options. Another option is selecting an "enrolled agent" — or former IRS official — that can help navigate the complexities of negotiating with the IRS. Debt settlements and bankruptcy are other options that can eliminate other debt obligations to pay the IRS.
How ZenLedger Can Help
ZenLedger makes it easy to aggregate cryptocurrency transactions across wallets and exchanges, calculate the gain or loss from each transaction, and populate popular IRS tax forms, such as Form 1040 Schedule D and Form 8949. The platform even provides an audit trail that makes it easy to prove compliance to the IRS in the event of an audit.[content_upgrade cu_id="676"]Don't forget to download our Checklist of the Common Crypto Tax Mistakes and learn how to avoid them on your returns.[content_upgrade_button]Click Here[/content_upgrade_button][/content_upgrade]
ZenLedger Auto-Generated IRS Filings - Source: ZenLedger
Since the transactions are automatically downloaded, there's no need for an accountant to spend many billable hours sorting through historical price data to come up with a cost basis for each transaction. You can provide your accountant with accurate information that they can use to prepare your taxes — or even import the data directly into TurboTax via an integration.ZenLedger even makes it easy for you to save on next year's taxes with our Tax Loss Harvesting tool. By identifying losing positions, you can sell them to realize a loss that can help you offset any capital gains or income. You can then replace the position with the same or a similar cryptocurrency to maintain your asset allocations and meet long-term goals.Sign up for ZenLedger today to see how easy it is to get started!
The Bottom Line
The October 15th extended tax deadline is tomorrow and it can be stressful trying to aggregate cryptocurrency transactions, calculate gains and losses, and compute what you might owe the IRS. Fortunately, there are tools that can help you accurately report your cryptocurrency transactions.Sign up for ZenLedger today to see how easy it is to get started!