written on behalf of Feigenbaum Law
Bitcoin and other cryptocurrencies have been making headlines once again as the price of Bitcoin continues to set new highs despite occasional dips in value. A story published on Yahoo Finance stated that Bitcoin’s dip below $50,000 (USD) was a massive drop from where it had been sitting at around the $58,000 mark. That said, the most popular cryptocurrency is still up significantly over the last year. As tax season approaches, people who have purchased or sold bitcoin may be wondering what the tax implications of cryptocurrencies are.
The IRS wants to know about cryptocurrency
The IRS has recently issued an update to the 1040 tax form with a new question, asking “At any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency.”
A story on Yahoo Finance explains that the IRA has treated Bitcoin and other cryptocurrencies as property for tax purposes, meaning the income generated from the mining or sale of them is taxable. However, it is believed that many people hide their digital assets from the IRS. As a result, the IRS issued a summons in 2018 that required the world’s largest custodian of virtual currency to disclose information on 13,000 users. The IRS has also issued summons from other organizations in situations where it believes a taxpayer has withheld information about cryptocurrency holdings. It’s natural to expect that similar initiatives will continue to occur.
The IRS had introduced the new Form 1040 question last year, but it was attached to Schedule 1, which is used by people reporting extra income, as opposed to the universally used Form 1040. The move will make it impossible for people to avoid answering the question for official tax records.
Canadians must also disclose gains from cryptocurrency
Canadians are not exempt from having to report gains from Bitcoin and other cryptocurrencies. The official stance of the Canada Revenue Agency (CRA) is that when Bitcoin is used to pay for goods or services, the tax rules for barter transactions are applicable. This means that if someone receives payment for goods or services in the form of Bitcoin, the person receiving payment has to declare that income even though no actual money changed hands.
In addition, people can also make money by selling Bitcoin if it goes up in value from the time they purchased it. In these situations, profits must be claimed as capital gains. For example, if you purchased $10,000 in Bitcoin at the end of 2019 and sold it for $100,000 at the end of 2020, you would have to declare a capital gain of $190,000.
While the future of cryptocurrencies remains unknown, there is no denying that they are becoming a larger part of the mainstream economy. Yahoo Finance reported that big-name investors are parking their clients’ money in cryptocurrency and that $5.2 billion of it was traded in Canada last year. As a result, we should not be surprised that it is becoming expected that people come clean about their cryptocurrency profits at tax time.
If you have questions about how investing in Bitcoin or other emerging currencies will affect your current tax plan contact Feigenbaum Law. Our team are leaders in the field of tax law, and offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.