A surge in cryptocurrency prices this year created many crypto paper millionaires and brought millions into the game. But the digital currency market is a rollercoaster ride. As a result, many of those fortunes have already evaporated as crypto prices fell precipitously.
Whether or not crypto will transform the nature of money remains to be seen.
It’s important to debunk the myths that can trap unknowing investors into gambling away their money – and failing to meet their tax obligations.
One thing is certain: before entering the market, investors need to understand the currencies and the business ecosystem built around them.
- The IRS Can’t Track You.
Fact: If the IRS wants to find you, they will.
Cryptocurrency like bitcoin is hard, but definitely not impossible to trace. The currency is only pseudo-anonymous. There are no secrets anymore. IRS has invested millions of dollars in software designed to follow crypto transactions. E-track, the IRS’ social media bloodhound and the dark web are also being watched.
You have to convert to crypto currency into fiat currency to get cash dollars out of it. All transactions are indelible. They cannot be erased.
- The IRS Only Cares If You Make a Lot of Money in Crypto
Fact: Cryptocurrency is taxable.
Prosecution of crypto investors by the IRS isn’t necessarily about the amount of money involved: it’s about perceived levels of abuse and the need to make examples to keep the public under control.
3- Virtual Currency Is Not Reportable.
Any use of virtual currency to acquire or exchange it for another asset is a reportable transaction.
The IRS is cracking down on cryptocurrency tax reporting. If you’ve engaged in cryptocurrency or other virtual currency transactions worth $20,000 in any one year between 2016 and 2020, the IRS wants to hear from you.
The IRS believes thousands of taxpayers are not telling the government about their income and investment gains from cryptocurrency transactions. Eventually, the $20,000 reporting trigger will disappear and crypto currency reporting triggers will come into coordination with other asset sale reporting triggers.
In a soft warning from the IRS, a “yes or no” question regarding cryptocurrency transactions began appearing on IRS approved tax return forms in 2019 and 2020. Taxpayers sign and date their tax returns in compliance with the new crypto asset class questions on 2020 taxes under penalties of perjury. An inaccurate answer is perilous.
The IRS first weighed in on crypto currency in 2014 with Notice 2014-21. That defined cryptocurrency as property, subject to general tax law principles.
In October 2019, the IRS issued Revenue Ruling 2019-24. This newer guidance covers “autogenerated” cryptocurrency.
4 – Crypto cuts governments and banks out of the equation.
The bitcoin white paper that set off the crypto revolution claimed that the electronic payment system would cut government and banks out of the equation. That’s unlikely. Government has a vested interest in collecting revenues.
Cryptocurrencies have no intrinsic uses since they can’t be easily used to make most payments. Value is based purely on public perception of what is valuable and the hope that value will continue to rise. If that changes, value could easily evaporate.
- Not every tulip is a pretty color. Trading in cryptocurrency is analogous to flipping real estate, and reminiscent of the Dutch tulip mania of the 1600s, which created one of the greatest market crashes of all time. In fact, the same phenomenon occurred in the 1400s, when Spanish explorers pillaged the Inca silver market. They took it back to Spain, where it eventually was a strong factor in the fall of the Spanish empire.
5 – Bitcoin Will Replace the Dollar
Digital currency value is not backed by anything other than the faith of the people who own it. The dollar, by contrast, is backed by the U.S. government. While dollars might become less important in making payments, the primacy of the U.S. dollar as a store of value will not likely be challenged.
The casino is open for business. Gamble at your own risk. ©