IRS Cracks Down on Crypto Holders Skipping Taxes: 3 Things to Know

The IRS is going after crypto owners who fail to report gains on their taxes. The IRS on Thursday obtained a court order ordering a bank in NYC to turn over records of potential crypto tax evaders.

As crypto markets appear in “winter” against purchases made last November, half of bitcoin holders are making profits. The IRS requires US taxpayers who sell bitcoin or other cryptocurrency for a profit to report it. And it is willing to use any means available to enforce compliance.

The government seized $3.5 billion in crypto last year alone.

Here are three things to know about filing and paying US income tax on cryptocurrency capital gains.

Cryptocurrency is considered property by the IRS

The Internal Revenue Service considers cryptocurrency property for tax purposes. Capital gains or losses apply as if gains are additional income (while losses reduce reported income).

This means that when you buy cryptocurrency, you have exchanged cash for real estate. It does not trigger a reporting requirement with the IRS.

However, when a US taxpayer sells cryptocurrency, the US tax code requires them to report capital gains or losses on their income statement.

How to properly account for crypto sales: FIFO, LIFO, HIFO

The IRS allows taxpayers to choose their own accounting method for calculating capital gains or losses. When accounting, cryptocurrency investors can use the FIFO, LIFO or HIFO method.

These stand for First in, First Out; Last in, first out; and Highest in, first out. To determine whether a sale resulted in a loss or gain, you must first establish the cost basis. These methods are all valid for determining the cost basis.

The only requirement is to follow a consistent accounting pattern within each income tax year. However, taxpayers can change the cost method from year to year.

No Section 1031 ‘like kind’ exemption for cryptocurrencies

There is no IRS Code Section 1031-like exemption for crypto. This has long been a cause of interest to the cryptocurrency community because 1031 allows tax deferral for similar exchanges.

For example, if an investor buys a house and rents it out for income, then sells the house three years later and buys two houses, they pay no tax on the capital gains from the sale.

But the tax authorities clarified in 2019 that the exemption does not apply to crypto. So trading BTC for ETH, for example, does not expose you to capital gains tax liabilities.