According to the updated IRS FAQs, purchasing virtual currencies using USD is not necessarily reportable to the IRS.
IRS Latest Update
Virtual currency holders who bought the assets via fiat money were confused about whether or not to tick ‘yes’ on IRS’ form 1040. The scenario only applies if the holder has no subsequent virtual currency transactions during the financial year in question.
IRS Fiat and Virtual Currency Regulations
It is now clear that the IRS does not have to know when and if you purchased crypto using fiat currencies. The IRS cleared the matter to eliminate the assumption that all crypto purchasers have acquired a financial interest in digital assets. However, if you use another virtual currency to buy digital assets, you must notify the economic watch. Cryptocurrency transactions are still subject to taxation.
When it comes to buying cryptocurrency with fiat money, these digital assets’ taxation becomes somewhat of a grey area for taxpayers. Crypto-users who value virtual currencies for their anonymity feature felt confused about how to go about answering the IRS’ question on whether they had acquired these digital assets.
Other taxable situations, such as selling digital coins, remain. One is required to recognize gains and losses when you sell your virtual currencies to acquire real currencies. Any form of payment for goods and services in virtual currencies is recognized as ordinary income and therefore is recorded as taxpayer’s income.
Targeting Cryptocurrency Tax Fraudsters
Last year, the form 1040 question seemed to be a way to pin down cryptocurrency users trying to evade tax. Nonetheless, after the IRS clarified the guideline, it is clear that by ticking ‘no’, one does not commit perjury. Still, the IRS is not in any way removing its foot on the gas pedal when it comes to apprehending tax evaders, especially those hiding behind cryptocurrency.
Virtual currency tax compliance is a confusing area for many financial regulators, including the IRS. However, the body has imposed several laws to govern the use of these digital coins in the current financial world, although there may or might not be loopholes.
One example of such laws is if you are paid in crypto, the virtual asset’s fiat money value at the exact time of the transaction is the taxable income. The IRS will use the ledger that recorded the transaction to determine the precise time and date.
Previously, the IRS sent letters to thousands of US citizens reminding them to report every cryptocurrency transaction they make. The regulatory body threatened to do financial examinations on those who did not file profits from virtual currency settlements, assuring dire consequences to such people.
The IRS letters also stated how it watches virtual currency financial activities, and it would not be difficult to find out if taxpayers left such transactions unrecorded.