How the Tax Extension Affects Cryptocurrency Tax Reporting

Savvy investors have been on to cryptocurrency for a few years now. This mode of exchange, based on blockchain technology, offers investors a chance to speculate on its future value and benefit whenever this value increases. Those who caught on to the potential of cryptocurrency early on have made thousands, if not millions of dollars. Over the span of one year, the value of a given cryptocurrency can increase by 1,000 percent.

Although cryptocurrency markets have risen and fallen over the years, there is still a lot of room for investment. Cryptocurrencies are quite volatile, meaning there is as much potential for loss as there is for gain, but the same could be said of traditional money markets. If you have some savings put aside for investment, you can make a decent income from cryptocurrency if you play your cards right.

In light of the COVID-19 outbreak and associated financial crises, the U.S. federal government decided to extend the deadline for filing income tax returns and paying the balance. But with this change affect your earning potential from your cryptocurrency investment?

What Tax Extension?

Unless you live under a rock, you’re aware of the global pandemic over the new coronavirus. Over the past three months, the coronavirus has forced business closures and changed consumer behavior, causing significant economic turmoil. According to NBC News, the fed predicted that the ramifications of the virus would lead to a 32.1 percent unemployment rate across the U.S. 

In response, the federal government has come up with a stimulus package and other policy changes to help Americans facing financial distress. One of these measures was pushing back the date for filing returns and paying income tax from the usual April 15 to July 15.

According to the Internal Revenue Service official website, “The Treasury Department and Internal Revenue Service announced today [March 21] that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020. Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed.”

How You Normally File Taxes for Cryptocurrency

Back in 2014, the IRS issued guidelines for taxes as they apply to transactions in cryptocurrency. This policy stated that for the purpose of taxation, all virtual currencies are considered property. In other words, the tax regulations that govern houses, land, and securities also apply to Bitcoin transactions. The IRS policy also explained that capital gains taxes do apply to cryptocurrency use. The following activities are all taxable:

• Using cryptocurrency to pay for goods or services
  
• Buying cryptocurrency with another form of cryptocurrency
  
• Receiving payments in the form of cryptocurrency
  
• Receiving any mined cryptocurrency

Physically filing your crypto taxes can be a long and complicated process. You’ll need two forms: IRS form 8949 and 1040 Schedule D. On these forms you will have to present in detail your transactions, gains, and losses. To do so correctly, you’ll have to keep meticulous records throughout the year. According to CNN, your log should include the date you purchases the crypto, how much you paid, the date you sold the currency, and how much you charged for it. Keeping track of all this information will make the tax-filing process much faster, and you will avoid any negligence that could lead to fraudulence.

How the Tax Extension Affects Crypto

The general shrinking of markets across the globe created by the COVID-19 pandemic has had a profound effect on cryptocurrencies. For example, the price of Bitcoin fell by nearly 50 percent over the month of March. On the surface, the declaration of a three-month extension on the tax filing deadline seemed like a welcome reprieve for crypto investors.

Since cryptocurrency tax is just an additional form when filing for the typical federal and state taxes, the extension applies to all. If you were an early filer, you should be all set. If you are more the type of get it done at the last minute, you have three more months to do so. In the meantime, you should always be keeping good records of your transactions as the IRS is still monitoring cryptocurrency incomes. Some cryptocurrencies offer statements of transactions, but only for transfers of certain amounts. Careful record-keeping will help to show whether or not you owe money for the capital gains tax.

In addition to maintaining clear records of your transactions, it is advisable to discuss the situation with your tax accountant. Professional consultants will ensure you take full advantage of any tax reprieves that are due, keeping you on good terms with the IRS.

Give Caesar His Due

The temptation to turn a deaf ear to the taxman and attempt to fly below the radar can be great, especially when it comes to cryptocurrency. But it is never a good idea to try and thwart the IRS, and not to mention illegal. Be sure to report your virtual transactions accurately and file your crypto taxes on time.

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Disclaimer: Blockmanity is a news portal and does not provide any financial advice. Blockmanity's role is to inform the cryptocurrency and blockchain community about what's going on in this space. Please do your own due diligence before making any investment. Blockmanity won't be responsible for any loss of funds.