Crypto and its popularity have been on the rise for years, but 2020 has been an excellent year for the industry in general. Many retail investors have gotten a lot of exposure to BTC (Bitcoin) and what value it would bring to your business. Publicly traded companies such as Square, MicroStrategy, and Grayscale have been beefing up their Bitcoin holdings. Additionally, major fintech companies such as PayPal have also launched their products to capitalize on this new found love for the cryptocurrency. As the year ends in a strong bull market, here is what you should be expecting in 2021 regarding the issue of taxation in this industry.
Increased Awareness in Cryptocurrency Taxes
Since cryptocurrencies are designed to be anonymous and very difficult to trace, many people think it’s not a taxable asset. However, the IRS said they would be asking the more than 150 million American taxpayers to declare whether they sold, exchanged, or bought any financial materials using virtual currency. This means that any taxpayer who dealt with this new asset class and didn’t declare it in their IRS Form 1040 could be classified as a tax evader. Although not a mainstream tax law and accounting area, the industry will need experts in cryptocurrency taxes and regulation to assist public members. Several nations worldwide have identified cryptocurrency as a good source of taxes and are thereby collecting a sum wherever applicable.
IRS Needs To Do Some Catching Up
The first virtual currency tax guidance booklet was first introduced to the public back in 2014. However, since then, the industry has gone through some massive changes that haven’t made it into the guide. Concepts such as yield farming, staking, and several aspects of DeFi are yet to be addressed in the guidebook’s current version. ETH (Ethereum), the second-biggest altcoin globally, transitioned from Proof of Work (PoW) to Proof of Stake (PoS) for the most efficient workflow. This change will bring on extra pressure on regulatory bodies such as the IRS to ensure everything stays on the up and up. Since 2014, new concepts have come up in this sector. Innovations such as DeFi need to study so that a comprehensive guide can be unveiled thoroughly.
Information Reporting For Exchanges
Exchanges are some of the most significant driving forces in the cryptocurrency industry. As it is, there is no standard formula for tax information reporting on cryptocurrency exchanges. Some exchanges issue Form 1033-Ks, others 1099-Bs and 1099-MISCs, while others don’t issue any at all. Because of the lack of information in this space, many users fill Form 1099-Ks, not exactly a cakewalk. Because of this confusion, many taxpayers end up with CP2000 tax notices, which can also take some time and effort to straighten up. In 2021, we expect a stringent IRS and other watchdogs such as the OECD to ensure compliance and correct tax information collection execution.
Crypto Tax Evasion Cases
Tax evasion is a grave crime, as it’s indicated on a federal level. Federal cases typically tend to be much worse than those at the state level and carry harsher sentences. In 2020, we saw a few high profile cases involving cryptocurrencies, such as Amir Bruno and John McAfee’s indictment. In 2021, with a new president and officials in place, you can expect more action from them going after both the big and small fish. People who fraudulently underreport their taxes or evade them entirely will have a difficult time.