The IRS & Virtual Currency Compliance
Bitcoin, Ethereum, Ripple, Monero, Tether, Libra. Cryptocurrency, blockchain, mining, smart contracts, digital wallets, hard forks. Confused yet?
According to the IRS there are more than 1,500 known virtual currencies and that number keeps growing. Virtual currency is gaining greater and greater acceptance as a medium of exchange in the mainstream marketplace. There are more than 7 million active Bitcoin users and 5% of Americans are included in that number. More than 80,000 businesses currently accept Bitcoin or other cryptocurrencies.
And the IRS is watching: Virtual currency is an ongoing focus area for IRS Criminal Investigation.
If you’ve never even heard of Bitcoin, you’re probably not concerned. On the other hand, if you or your business have mined, purchased, traded or conducted any virtual currency transactions, take note!
Virtual currency transactions are taxable by law just like transactions in any other property, so yes, you have to pay taxes on Bitcoin transactions.
Virtual currency is treated as property for U.S. federal tax purposes and general tax principles apply. The IRS says,
“Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency… Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS.”
Taxpayers who do not properly report virtual currency transactions to the IRS can be audited for those transactions and may owe penalties and interest. Audit results could also trigger criminal prosecution for tax evasion and/or filing a false tax return.
If you have only purchased cryptocurrency, you should not have to pay additional taxes. Taxes kick in when transactions occur. Exchanging a cryptocurrency for another, converting it back to USD or spending cryptocurrency are taxable events. Gains and losses on all individual trades must be reported to the IRS and are subject to capital gains tax. Use Form 8949 to report on each digital trade and Form 1040 Schedule D to report total short-term and long-term gains and losses.
If you are a business owner and you pay employees or contractors via Bitcoin or receive cryptocurrency for goods or services – the IRS expects taxes to be paid, “ at the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” Use the standard W-2 or 1099 for payments to employees and contractors.
If you’re a “Miner” of virtual currencies, Self-Employment Tax kicks in, too, but some business expenses are deductible.
The emergence of virtual currencies is so new that the IRS rules and regulations may seem complex and confusing, but paying cryptocurrency taxes is just like paying any other type of capital gains or income tax. IRS Notice 2014-21 is the most recent guideline from the IRS.
Avoiding or under-reporting those taxes are considered tax fraud and can result in a maximum sentence of five years in prison or a maximum fine of $250,000.
Bottom line – Keep accurate records, stay on top of the IRS requirements, pay your taxes and talk to your accounting firm if you have questions!
TYS would welcome your questions please contact us, we look forward to serving you.