IRS Updates Crypto Tax Forms & Rules for FY 2021-22

This blog post serves as a documentation of all updates that the IRS & Biden’s Administration have proposed with regards to Crypto Tax Forms & Rules for Tax Year 2021-22.

Development of new products on both CeFi & DeFi blockchain protocols pose multiple transaction scenarios that is taxable. But, taxes on crypto activities have been in a very grey area for years.

Tax rules are still developing and are constantly changing. Many taxpayers are either not aware of taxable events in the crypto world, or don’t know how gain/loss on taxable activities is calculated. While some of them end up over or under-reporting on their crypto income, some don’t even file them.

Key Highlights

Internal Revenue Service (IRS) chief Charles Rettig says that United States is losing about a trillion dollars every year in unpaid taxes, and credits this growing tax gap, at least in part, to the rise of the crypto market.

Therefore, in order to capture accurate information on a taxpayer’s crypto activities and make them more tax-compliant, the IRS is taking several measures:

  1. Modified Crypto Question Language for 1040 Tax Form
  2. Proposal for New Crypto Tax Reporting Requirements
  3. Memorandum to Clarify That Crypto Swaps Aren’t Tax-Free

Let’s get into it one by one!

Modified Crypto Question Language on IRS Tax ‘Form 1040’ for FY 2021-22

In Tax Year 2019, IRS asked taxpayers whether they had dealt in crypto for the first time.

Problem: IRS asked the question on Form ‘Schedule 1’. But, not everyone files this form. ‘Schedule 1’ is typically used to report income that isn’t listed on Form 1040. For example: Income from capital gains, alimony or gambling winnings.

2019 Question on IRS Tax Form 'Schedule 1'

In Tax Year 2020, IRS moved the question from ‘Schedule 1’ to ‘Form 1040’. Because all U.S tax payers use ‘Form 1040’ to file tax returns. It is nearly impossible to miss the question since it is placed immediately after personal details.

Problem: The question read, “At any time during 2020, did you receive, sell, ‘send‘, exchange, or otherwise ‘acquire‘ any financial interest in any virtual currency?”

But, ‘sending’ or ‘acquiring’ crypto isn’t taxable. The question can be perceived otherwise & create confusion among taxpayers.

2020 Question on IRS 'Tax Form 1040'

For Tax Year 2021, IRS has modified the question in a draft version of Form 1040:

“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in virtual currency?”

  • The word ‘send’ is removed
  • ‘acquire any financial interest’ is replaced with ‘disposed of any financial interest’

This means that you don’t have to check “Yes” if you ‘send’ crypto in between wallets/exchanges or ‘acquire’ them. Both are non-taxable transactions.

2021 Draft Version of IRS 'Tax Form 1040'

Before finalizing, ‘Form 1040 for Tax Year 2021’ will go through several revisions. Follow us on twitter to stay updated!

Biden’s New Proposals for Tax Reporting

US Treasury Department’s new ‘Greenbook’ released in May. The Greenbook is a comprehensive guide of the government administration’s revenue proposals for fiscal year 2022.

Biden Administration made the following proposals for crypto tax reporting requirements:

  • Businesses must report crypto transactions worth +$10k
  • Raise tax rate on long-term capital gains to 43.4%
  • Crypto custodians & exchanges must report data on user accounts who conduct atleast $600 worth of gross inflows/outflows every year.

Crypto Swaps Aren’t Tax-Free:

In the United States, crypto assets are considered as ‘property’, and ‘capital gains tax’ is to be paid for gains made on crypto assets.

Section 1031 of the Internal Revenue Code allows taxpayers to defer tax on ‘exchange of like-kind property’. For example, if you were to exchange or swap one type of gold coin with another type of gold coin, you can defer taxes on the exchange.

Before December 31st, 2017, ‘like-kind property’ referred to any property held for business or investment purposes including “real-estate, art, equipment, stock in trade, securities, certificates of trust, partnership & beneficial interests”. After December 31st, 2017, only real estate for business or investment purposes is considered as ‘like-kind property’ under Section 1031.

Taxpayers questioned if the exchange of one crypto asset with another crypto asset could also considered as a ‘like-kind exchange’ under Section 1031 before Dec. 31, 2017. For example: Buying ethereum with bitcoin. Because, before this date, ‘like-kind property’ could be any ‘property’.

In response to this, IRS released a memorandum in June, which clarified that an exchange between (i) Bitcoin & Ethereum, (ii) Bitcoin & Litecoin, (iii) Ethereum & Litecoin, doesn’t qualify as like-kind exchange under Section 1031 of the Code. Because every cryptocurrency coin runs on its own blockchain network and have different use cases. Therefore, swaps between cryptocurrencies were taxable even before 2018.

Link to the IRS released memorandum

A Simple Guide to Crypto Taxes

Confused about crypto taxes? Our blog post – “The Simple Guide to Crypto Taxes” – can clear all your questions:

  • Which crypto activities are taxable?
  • Which crypto activities are tax-free?
  • How to calculate crypto taxes?
  • Which forms to use?
  • How to save on crypto taxes?

We will update this blog post as changes take place. To receive regular updates, follow us on twitter !

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