According to the Cryptocurrency FAQ (Q5) updated by the U.S. Internal Revenue Service on March 2, 2021, cryptocurrency purchases made in fiat currencies are not subject to any type of U.S. Internal Revenue Service tax report.
Earlier news, on December 11, 2020, the US Internal Revenue Service issued a new 2020 tax year 1040 return, all US taxpayers are required to submit this return. The lack of clear guidance on the definition of "virtual currency" has made some cryptocurrency users confused.
Subsequently, the U.S. Internal Revenue Service (IRS) issued a revised draft of Directive 1040 on December 31, 2020, which clarified the content covered by the term virtual currency. The IRS uses the term virtualcurrency to describe various types of convertible virtual currencies used as a medium of exchange, such as digital currencies and encrypted currencies, and points out that no matter which version is used, if a particular asset has the characteristics of a virtual currency, it will be considered Virtual currency. The updated draft requires that if citizens purchase cryptocurrency during 2020, they must check "Yes" on the virtual currency issue on page 1, although this may not trigger any taxable events.
On January 4, 2021, DonFort, the former head of the Criminal Investigation Department of the US Internal Revenue Service, published an article that the US Internal Revenue Service may accelerate the pace of cryptocurrency taxation enforcement. The article said that although the agency has so far focused its resources on providing appropriate reporting guidelines to the public, it will now shift to stricter enforcement. According to the article, major trends such as the U.S. Internal Revenue Service moving the cryptocurrency tax issue to the top of the 1040 form indicate that it is working to eradicate the phenomenon of insufficient payment of cryptocurrency taxes.
Now, the new guidance from the Internal Revenue Service (IRS) provides clearer instructions for taxpayers to answer this question. In addition, privacy-conscious crypto users will realize that they do not need to unnecessarily disclose their involvement in cryptocurrencies to the IRS.
However, FAQ-Q5 only applies to cryptocurrencies purchased with fiat currency. If you purchase a cryptocurrency using another cryptocurrency, you must check "Yes" on the 1040 form question. This may also trigger taxable events.
It is worth noting that as Bitcoin gets more and more attention, it may also be subject to further scrutiny by regulators. The Internal Revenue Service is also accelerating the pace of cryptocurrency taxation enforcement. As early as January 4, 2020, the U.S. Internal Revenue Service (IRS) stated in its Frequently Asked Questions (FAQ) that donors who donate more than $5,000 in cryptocurrency to charities must conduct tax assessments on their donations. This may affect the vigorous development of cryptocurrency in philanthropy. Alex Wilson, co-founder of the cryptocurrency charity TheGivingBlock, said that this new assessment requirement will make people hesitate to donate more than $5,000.
In November last year, Erika Nijenhuis, senior adviser to the Tax Policy Office of the U.S. Department of the Treasury, also stated that the U.S. Internal Revenue Service (IRS) is evaluating different approaches to cryptocurrency taxation regulations. Nijenhuis also pays attention to the burden that each method places on cryptocurrency related parties (such as exchanges), as well as a series of benefits that each method brings, such as improved compliance.
In addition, the trends of the US Internal Revenue Service (IRS) also affect investors' adoption of encryption. ARKCEOCatherineWood stated in December last year that Bitcoin's extremebullish did not invest a large amount of money because of compliance considerations (more than 10% of the return will be confiscated by the IRS).
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