There is never a shortage of tax problems affecting Americans but investing in cryptocurrencies has created even more issues for numerous California taxpayers. The complexity of using virtual currency has led to tax filing complications for many American investors, and seeking advice from a cryptocurrency lawyer is often in their best interest. Below are some facts to help filers understand how the gray area of cyber currency is viewed by the Internal Revenue Service and how to know when it is time to contact a cryptocurrency attorney:
Cryptocurrency Fails to Escape IRS Scrutiny
Investors, individuals, business owners, and even college students have gained or lost money by using bitcoin and other types of cryptocurrency. Most crypto attorneys would agree that most of these people did not see IRS trouble coming when they dove into the virtual currency world. Nevertheless, many have by now discovered that such currency transactions may indeed be taxable, and that the IRS has put steps in place to ensure the Government gets its cut.
The IRS obviously scrutinizes anything that is considered a source of income, and some bitcoin investors may have thought virtual currency would essentially was beyond the scrutiny, interest and reach of Uncle Sam. Unfortunately for certain individuals, this was not the case. In our opinion, most effected taxpayer did not have any nefarious intent in regards to their crypto transactions.
Additional Field Shows Up on 2020 Income Tax Return Form
The 2020 income tax return will feature an additional field asking whether the filer bought, sold, or otherwise had any financial interest in bitcoin or other kinds of virtual currency. This is because the way such currency is taxed depends on the circumstances surrounding when it was acquired, its worth at that time, and its value at the time it was used.
Although the IRS does not consider bitcoin, litecoin, Ethereum, or coinbase as actual currency, they do tax it as property, just as they do homes or stocks. For this reason, if any type of cyber currency is sold after its value has increased, it becomes subject to ordinary or capital gains tax, which can be anywhere from 10% to 37%.
What Taxpayers Need to Know
Over the past two years, the IRS has been using IRS Tax Notice 6174, which states that they believe the filer has unreported cyber currency transactions, or transactions that were not reported correctly. This letter essentially implies that the IRS believes the filer made a mistake and gives him/her a chance to make corrections.
Worded a bit more sternly is IRS Tax Notice 6174-A, which states that the IRS knows about the filer’s crypto accounts, outlines reporting obligations, and tells the filer to take quick action.
IRS Tax Notice 6173 means business. It states that the IRS is aware the filer has one or more crypto accounts and has failed to report gains. Receiving any of these tax notices is an indication that it’s time to seek the advice of a crypto lawyer ASAP.
Understanding How Cryptocurrency Is Taxed
When reporting cyber currency to Uncle Sam, understanding how it is taxed is essential. In most instances, the IRS regards virtual currency as property. Therefore, if someone bought cryptocurrency, then exchanged it or sold it for something else, it should be logged as a capital gain or a loss, whichever applies. If it is the former, the taxpayer is responsible for any taxes on the profit of the transaction.
The mandatory reporting threshold regarding such currency is greater than $20,000 for the tax year or the completion of 200 or more receipt transactions. Anyone in this category who has not paid cryptocurrency taxes could face an audit, additional penalties, fees and interest, or other, more serious tax consequences.
Additionally, anyone who has earned virtual currency as wages must fill out the proper tax forms to declare the income. This may involve securing a 1099 form from the person for whom the work was performed, or simply declaring “Independent Contractor Income” on the return.
Cryptocurrency that is mined is considered taxable income by the IRS as well. Bitcoin mining is simply the process of creating new bitcoin by solving a computational puzzle. The latter is needed to manage the transaction ledger on which bitcoin is based. Because it is sophisticated and complex, and not the way mainstream America typically obtains cyber currency, some filers think mined cryptocurrency is safe from Big Brother’s prying eyes, but that is not the case. Therefore, taxpayers should always reference the fair market value of mined virtual currency at the time of acquisition.
Ultimately, no matter what cyber currency activities a person engages in, the taxpayer needs to keep track of the initial value of the asset, also called “cost basis,” The basis will determine what, if anything, is owed on cryptocurrency gains.
Why Concealing Virtual Currency Is a Bad Idea
Unless a person’s goal is a tax audit, a virtual currency stash should never be concealed. This is because, similar to all types of income or capital gains, the unreported funds will eventually wave a red flag at the IRS. Those who think they may owe past-due cryptocurrency taxes should get legal advice, as certain options may be available. These include paying off the past due amount on an installment plan and similar arrangements. An amended tax return 1040X may need to be filed to correct any under or even over reporting. Like other tax debts, bill caused by crypto gains may qualify for an offer in compromise or penalty relief.
Contact a Legal Professional
Filers who think they may owe bitcoin taxes and are concerned about an audit should know that these concerns are not unwarranted. The IRS has begun aggressively pursuing those who owe virtual currency taxes, and thousands of the aforementioned letters have been sent to such individuals.
Our cryptocurrency attorneys have expertise in all areas of dispute resolution concerning the complicated and ever-changing world of cyber currency.
Those who have received an IRS letter or think they may be on the tax authorities’ radar for cryptocurrency taxes should contact us for a free consultation as soon as possible.