Grayson Milbourne, Security Intelligence Director at Webroot, an OpenText company
With less than two months to go until the 2022 tax deadline, cryptocurrency investors are discovering that filing their taxes may be a bit more complicated this year. The IRS is asking everyone filing a return about their cryptocurrency activity, and this might also present the first time that many consider the tax implications of buying, selling, and trading crypto because the IRS treats virtual currencies, like Bitcoin, Ether, and NFTs different from other assets and investments. There are specific rules if you sold or traded crypto assets last year—and when combined with the sharp rise of ransomware threats and complex navigation, there are added layers of new risk that were not present in years prior.
What is New for 2021 Tax Filing Around Crypto?
The average investor needs to understand that cryptocurrency is not like any other types of currency because it is treated as property for tax purposes. Anytime you have used or conducted a transaction in cryptocurrency, you have the potential for gain or loss on your tax return, however, if you used fiat currency (U.S. dollars) to buy crypto assets in 2021, for now, you don’t have to report anything about it on your return.
What is New from the IRS?
The IRS has been vaguely asking about your cryptocurrency since 2019, but new to 2021 is the 1040 US Individual Income Tax Return form that features a detailed question about crypto; “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?” If you only purchased cryptocurrency with U.S. dollars (you didn’t sell or exchange), you can check ‘no’ on that question. To add, the IRS recently updated their FAQ page on digital currencies to underline this point.
What is New from the Justice Department?
As cybercrime issues like ransomware and malware continue to bring increased attention to illicit uses of cryptocurrency, law enforcement agencies have dedicated more resources to cryptocurrency-based crime.
The combined value of all cryptocurrencies is a matter of economics, as we saw it’s fame grow by over 185% in 2021, according to the World Economic Forum, noting that nearly three-quarters of all losses were from DeFi protocols, an emerging form of financial technology that operates on a peer-to-peer basis rather than through an exchange.
Just recently, the U.S. Justice Department created a new role, appointing the very first Director as part of the National Cryptocurrency Enforcement Team to address the challenges posed by the criminal misuse of cryptocurrencies and digital assets. This effort comes just in time as crypto mining reached a 300% growth over the past year, increasing the risk of those undefended networks.
Tax Season is Cyber Scam Season
With ransomware at historic highs, it doesn’t just hit big businesses. In fact, small businesses are the most often targeted during tax season. After navigating the new laws around cryptocurrency, learning how to stay safe this tax season can be less stressful by following these five easy steps:
- Do Your Own Searching: Navigate to the tax-related websites yourself by conducting your own search—always use a tool that helps you see the safety rating of the search results.
- It’s a Scam if the email claims to be from the IRS: the IRS will not contact you via email, text messaging or your social network, nor does it advertise on websites.
- It’s a Scam if the email appears to be from your employer, bank, broker, etc. claiming there is an issue with what they reported requesting verification.
- Is Your Tax Preparer Secure: Ask about the data security precautions your tax preparer uses to protect your information – if their computers aren’t secure, your information isn’t either.
- Stay Current: Have a strong antivirus and antispyware software installed and current.
It’s Not Over Yet
Don’t let your guard down after you’ve filed—tax scams turn into ‘refund scams’ and ‘audit scams.’