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Friday, March 1, 2024

Cryptocurrency’s value plummets. Here’s what it means for your taxes

  • Whether you’re snapping up the virtual currency as prices tank or you’re selling your holding, you’ll likely have a reporting obligation to the IRS.
  • The IRS asks on the front page of the 2020 income tax return whether you’ve transacted in any cryptocurrency over the year.
  • Understanding your tax treatment largely depends on the basis — your original investment in the cryptocurrency. Be ready to track and report your transactions.

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Holders of cryptocurrency have more than price volatility to worry about this year. The taxman wants to know about your trading activity.

Bitcoin hit fresh highs during the weekend, creeping toward $42,000 on Jan. 8. However, its value tanked on Monday amid a sell-off in cryptocurrencies, and bitcoin's value is now hovering around $33,000.

Regardless of whether you interpret the decline in price as a buying opportunity or an alarm to get out, you'll need to share the information with the IRS.

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Transactions you partake in this year will be reportable when you submit your 2021 tax returns next spring.

This tax season, the taxman asks a "yes or no" question on the front page of the 2020 federal income tax return: "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

"If you're particularly active using bitcoin, not only is every transaction potentially income or a deduction, but when you use it to pay for goods, you could have reportable gain on that bitcoin," said E. Martin Davidoff, partner-in-charge in the national tax controversy practice of Prager Metis.

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