The United States government and the Internal Revenue Service (IRS) have established rules and regulations regarding bitcoin, dogecoin, and other forms of cryptocurrency that may impact investors in the years to come. “In IRS Notice 2014-21, virtual currencies like Bitcoin are classified as property,” comments Philip L. Liberatore, CPA, who provides small business tax preparation, accounting, bookkeeping, personal tax planning, and tax preparation “The IRS has become aware of the growing popularity of this medium of exchange, as well as the fact that it is not recognized as legal tender by any government.” However, new laws have come into effect that make reporting cryptocurrencies more complicated than checking a box on income tax forms.
The Infrastructure Investment and Jobs Act (H.R. 3684) requires digital asset brokers to issue a 1099-B form, notifying the IRS of any cryptocurrency transactions as they happen. “The outcome for users is not favorable” says Philip Liberatore, founder and president of Philip L. Liberatore, CPA. While these new standards will not become effective until December 31, 2023, those who have invested in bitcoin, ethereum, litecoin, non-fungible tokens (NFTs), and other digital assets should begin to keep track of their digital exchanges. Investors need to ensure that records of profits and losses generated throughout the year are maintained. For the time being, however, cryptocurrency enthusiasts need only to follow the rules set out for them in IRS Notice 2014-21. If digital asset holders simply made a virtual currency purchase using U.S. dollars, they will not have to report that transaction on their 2021 income tax form.
The cryptocurrency market has boomed in the last few years, hitting a $3 trillion high in November 2021. The IRS, in turn, has scrutinized many of these transactions, especially those worth more than $20,000. In 2019, the agency stated that it had prepared more than 10,000 educational letters to send to cryptocurrency users who were under suspicion of not having been honest in their reports. “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest, and penalties,” said IRS commissioner Chuck Rettig.
H.R. 3684 will now rely on brokers, defined in the law as “Any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person,” to help monitor cryptocurrency transactions. Some of the revenue generated from these new taxes will help to fund H.R. 3684, with an estimated $28 billion expected to be raised from the new legislation. Furthermore, the IRS has now ruled that any cryptocurrency transaction worth $10,000 or more must be reported, a requirement that does not start until January 1, 2024.
Philip L. Liberatore, CPA was founded in 1988 by Philip Liberatore, an established CPA and entrepreneur. The organization, which has its headquarters in La Miranda, California, provides accounting and financial guidance to people and companies in the region. With a wide variety of services and a focus on customized care, Philip L. Liberatore, CPA is committed to uncompromising quality standards when catering to the needs of its clients.
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