The IRS has a new tax form out and wants to know all about your cryptocurrency

Tax season is still months away, but the IRS will want to know about your cryptocurrency holdings.

The IRS just released a new Schedule 1 for the 2019 tax season, spelling out the details on above-the-line deductions, including the tax break for student loan interest and health savings account contributions.

Eagle-eyed taxpayers will notice that the IRS threw in an extra question on the form: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

This is the agency’s latest effort to gather additional information on taxpayers’ virtual currency holdings.

See below for the form

“The biggest thing is that the IRS is asking this for a reason, and my question is how much have you increased your audit risk by checking ‘Yes’ in response?” asked Jeffrey Levine, CPA and director of financial planning at BluePrint Wealth Alliance in Garden City, New York.

Indeed, the IRS has signaled that it would be taking a closer look at cryptocurrency.

Back in July, the agency announced it was sending letters to more than 10,000 taxpayers with virtual currency transactions who may have failed to report income and pay taxes owed.

Here are the tax basics on cryptocurrency.

If you sold your cryptocurrency, you need to report the transaction. If you wound up with a capital gain, you must pay the appropriate tax.

Cryptocurrency you receive from an employer is subject to federal income tax withholding, FICA tax and federal unemployment taxes, just like wages. These should be reported on your Form W-2, the IRS said.

Meanwhile, independent contractors who are paid in virtual currency must pay self-employment taxes.

For those who mine cryptocurrency, the fair market value of it as of the day of receipt is included in your gross income, according to IRS guidance.

Failure to properly report these transactions can be costly: You may be audited and held liable for penalties and interest.

In the most extreme cases, you could face prison time and a fine of up to $250,000.

“A taxpayer who is investing in virtual currency should have a system for tracking the purchase and selling price of the assets,” said April Walker, lead manager for tax practice and ethics at the American Institute of CPAs.

“For tax purposes, the virtual currency is treated as property, similar to a security,” she said. “Therefore, taxpayers should maintain cost records similar to the way records are kept for stocks and securities, although there will be no monthly statements.”

Gathering the data for computing these taxes is easier said than done.

That’s because to calculate what you owe, you’ll need your cost basis — that is, the original value of the asset for tax purposes.

“Back in 2018, the reporting requirements were still catching up to the times,” said Dan Herron, CPA at Elemental Wealth Advisors in San Luis Obispo, California.

“We’d have to go through 50 pages of transactions, throw it into a spreadsheet and figure out what did you buy this for, what did you sell it for,” he said.

If you need to hunt down the cost basis of some long-held stocks and your brokerage firm doesn’t have that information, you could dig up historical prices and dividend payments to figure it out.

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The process is less straightforward with cryptocurrency, which any investor can trade on multiple platforms — and the exchange price can differ across platforms. The onus is on the taxpayer to keep track of the cost basis.

Indeed, some providers, such as Lumina and Bitcoin.Tax, have stepped up to aggregate crypto transactions and help calculate cost basis.

“If you’re a trader of bitcoin or other cryptocurrency, you’ll want to invest in some accounting software specific to crypto that will allow you to track transactions,” Levine said.

“Otherwise finding out your basis is going to be a disaster,” he said.