Pay taxes on your bitcoin profits

Mar 12, 2020 | Blog

Why Your Cryptocurrency Is Not Immune from IRS Scrutiny 

Many investors and other individuals have made or lost money through the use of cryptocurrency, such as Bitcoin. However, our tax attorneys believe that this type of currency is not exempt from IRS scrutiny and can indeed be taxed.

Your 2019 income tax return has a new field in which the agency asks whether you bought, sold, or otherwise acquired a financial interest in Bitcoin or any other type of cyber currency. The way such “money” is taxed depends on how it was acquired. For this reason, whether you buy, sell, earn, or receive virtual currency as a gift, keep close track of it to avoid problems with the Internal Revenue Service.

The New Kid on the Block-Chain is Under IRS Scrutiny

Virtual currency is obviously the newest player on the field, and the IRS is cracking down on people attempting to avoid paying taxes, if they are owed, on cryptocurrency gains. April Walker, a manager at the American Institute of CPAs, stated that there are multiple ways a person can interact with cryptocurrency from a documentation standpoint. However, she affirms that logging your transactions is vital.

This is because the IRS is not turning a blind eye to gains made through cryptocurrency. This is evidenced by a letter the agency sent last summer to over 10,000 filers who may have neglected to declare income and pay taxes owed on cryptocurrency gains.

What You Need to Know about Cryptocurrency taxes reporting

When reporting your cyber currency to Uncle Sam, you should be aware of things such as how it is taxed. In most cases, virtual currency is considered property by the IRS, similar to the way they regard investments such as stocks or mutual funds. For this reason, if you bought cryptocurrency like Ethereum or Bitcoin and then sold it or exchanged it for something else, it should be logged as either a loss or a capital gain. If it is the latter, you are responsible for any taxes related to the profit.

Although cryptocurrency exchanges such as Coinbase may give you a Form 1099-K with the details of your transactions, this is not guaranteed. For example, to receive a 1099-K, your gross sales for the year must be at least $20,000, with a minimum of 200 transactions.

Virtual Currency as Wages

Cyber currency received as wages must be treated as such, and taxes should be withheld by your employer from that currency. If you worked on a 1099, you must fill out the appropriate tax forms to declare the income as an independent contractor.

Watch the Cost Basis

Cryptocurrency that you mine is also regarded as taxable income by the IRS. Always reference the fair market value of your Bitcoin or other virtual currency the day it was acquired. Ultimately, as you gather information to back up your cyber currency activities for the IRS, closely watch the initial value of the asset. The IRS calls this your cost basis, and it is the number you work with to determine what you owe, if anything, on cryptocurrency gains.

Never Hide Your Bitcoin Stash

Do not try to conceal your virtual currency stash, as this places you at risk for an audit. If you are unsure about the tax implications of your Bitcoin transactions or other dealings with virtual currency, get in touch with one of our tax attorneys in San Jose or San Francisco without delay to ensure the best possible outcome.  If you believe that you missed reporting some gains in previous years, you should review the option of filing an amended tax return to avoid possible penalties.  If you owe taxes on your Bitcoin or other crypto gains that you cannot pay, the IRS may grant you an installment plan, or even an Offer in Compromise depending on your eligibility.