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Last Updated on: 15th March 2023, 06:13 pm
For many, Bitcoin and other digital currencies offer significant promise. For many, digital currency has been a way to build immense wealth. The addition is that wealth is still subject to regulation, and taxation, by the IRS.
Taxpayers who fail to recognize this and fail to pay their tax obligations – risk fines, penalties, interest, and there are other consequences. Bitcoin is considered income.
All income is subject to income tax, even if you don’t get a w-2, 1099, or other tax documents.
The Spodek Law Group can help with all cryptocurrency tax issues
In Notice 2014-21, the IRS announced the tax rules Bitcoin would receive. While many people thought that Bitcoin should be treated like other currency for tax purposes, it’s not. Bitcoin, and other digital currencies should be treated as property for tax. The IRS based this on the fact that unlike traditional currencies, Bitcoin isn’t regulated, or governed, by a national government. As a result, Bitcoin doesn’t have legal tender status.
Because Bitcoin is treated as property, it gets tax treatment. It means you have to account for gain and loss which occurs. The failure to account for capital gains means it results in tax penalties. Failure to account for capital losses means you’re paying for more in tax than required.
How should I account for Bitcoin capital
USA taxpayers who hold, and transfer, Bitcoin have to record the value of the Bitcoin they got. They need to record the value of the currency sold, traded, transferred, or disposed. The difference is the capital gain or loss.
Typically, the gain or loss is recorded at the time of the transfer. The capital gain or loss can be reported by completing Schedule D of your taxpayer income return. Once computed, all information must be transferred to line 13 of the individual tax return. Taxpayers need to account for all of their capital gains, and losses. The failure to do this, can result in a tax penalty or interest.
Business owners who improperly use Bitcoin can create employment tax or self-employment tax problems
Employers who choose to use Bitcoin to pay employees, or contractors, may be causing issues for themselves. Payments in Bitcoin is possible in independent contractor relationships. But employers and employees can use Bitcoin too. Employers must withhold employment taxes from employees. Failure to do so, can lead to significant fines, and significant penalties. If there are unpaid employment taxes, both the business and responsible parties can be held jointly liable.
Can trading, selling, or using Bitcoin trigger IRS audits?
The IRS has recognized that bitcoin can be a potential way of abusing, and evading, taxes. There is a belief that some taxpayers are using Bitcoin to avoid income, and other tax. In 2016, the IRS petitioned a federal court to serve John Doe summons on Coinbase.
A John Doe summon is used by prosecutors, and regulators, when they believe that there are violations of the law happening, but don’t know who the specific parties are. This summons is filed to compel the release of account information.
In 2016, a federal court granted this motion to serve Coinbase. The IRS has used this tactic in the past to compel a release of account records and data, concerning offshore bank accounts.
What should I do if I fail to pay Bitcoin taxes?
If you failed to pay Bitcoin taxes, you could face consequences. This can mean penalties, and fines, and allegations of tax evasion. The exact risk you face, depends on your circumstances, and other factors that the IRS agent / auditor will look at. Hiring an experienced tax attorney can help you understand your tax obligations.
Hire our Cryptocurrency tax fraud lawyers
If you are facing an issue, it might be a good idea to consult with our attorneys. The IRS has issued general advice on how to handle tax gains and losses. Rather than treating bitcoin as a currency, IRS treats it an asset/property for tax. It means you must keep track of every gain or loss.
Are Bitcoin Miners Required to Pay Self-Employment Tax?
There are many bitcoin miners who took up an interest in this activity and were early adopters. Following the spike in Bitcoin, many people got into it to make money. The issue is, now that Bitcoin is classified as property, many of these people have to pay taxes.
Regardless of whether you had intended to start a business and make money or not, you are subject to self-employment and other taxes, due to the profit you’re making.
Income earned is subject to either payroll taxes, or self employment taxes
All income earned, is subject to tax. When you perform work for compensation, as an employee or independent contractor, you are compensated. Regardless of whether your bitcoin mining operation is a business or hobby, you must pay self-employment tax.
Can I Appeal a Bitcoin Tax Determination by the IRS?
If you have a bitcoin tax issue, the agency might be auditing you. The audit is designed to uncover tax issues which may result in additional taxes due. Alternatively, the IRS might decide to file an additional tax due to a failure to pay capital gains taxes, employment taxes, income tax, or other financial obligation related to your Bitcoin — with interest. The appeals of IRS tax determinations is an option you have.
The exact type of appeal that is available to you will depend on where in the assessment and collection process you are. It’s important you speak to a bitcoin tax attorney who can help you – before you file an appeal, because certain appeal options can limit your ability to appeal further in federal courts.
You have a right to appeal unfavorable tax determinations
If you disagree with the IRS, you have a right to file an appeal. There are strict time limits though. Taxpayers who fail to file a timely appeal can lose their ability to do so.
In general, following an IRS audit, you will get a letter setting forth your rights. The 30 day letter sets the IRS’s determination and your rights. You should respond to the letter. If you do not, a 90 day notice of deficiency will be issued. Should you decide to appeal, you can elect to file for a case review. Small case reviews are available if the amount is $25000 or less. Additional appeal options also include an appeal in federal court.
The collection process can also be appealed
If your legal issue is beyond the assessment phase and the IRS actively is trying to collect debt, then you can engage in collection appeals. Collection appeals options include CDP and CAP. Each appeal program has a different focus, and can impact your later appeal options. It’s important to hire a tax lawyer before you do anything.
What should you do if you had bitcoin at coinbase, and the IRS wants your trade history?
Many people have used Coinbase and other exchanges. You’re probably aware that the IRS has taken an interest in your activities. Many people believe that their Bitcoin is just a mere hobby which can’t result in tax implications. The reality is that most people have failed to account for capital gains, or other tax obligations, which could create penalties and fines. If you engaged in a scheme to avoid, or evade, income taxes, the penalties can be harsh.
Courts are granting the IRS John Doe Summons
Many people have heard that the IRS was trying to get account records from Coinbase. Many people think this will not happen. The fact is that the John Doe summons tactics have been used in the past, and succeeded. If the IRS send a John Doe summons, assume it’ll go through. If the IRS wants your bitcoin trade history, we recommend you speak to our attorneys.
In the past, when the IRS was proceeding against taxpayers, the John Doe Summons was the first step in discovering the accountholder’s real identity. In this instance, if the IRS wants your bitcoin trade history, it’s likely that Coinbase, or whichever exchange you used, will turn over the relevant information. In 2016, the federal courts granted the IRS’s request for Coinbases information.
What should I do if I have unpaid bitcoin tax
If you sold Bitcoin, or were paid for work performed in Bitcoin, you should get the guidance of a tax attorney. You should contact our tax lawyers if you’re worried about potential criminal tax implications. We can provide you with meaningful advice on a path forward.
We recommend you speak to us, because you are protected by the attorney-client privilege. If the IRS subpoenas your CPA, he/she has no such protection and will become a witness against you.
Should you report Bitcoin on your taxes?
The IRS is looking for bitcoin tax evaders. The Department of Justice has filed major requests in federal courts requesting identifies of all customers who have bought bitcoin from Coinbase. The document, known as John Doe summons, can only be served by the IRS if there is federal court approval. The summons are proof that the IRS believes people have failed to comply with tax laws.
The IRS is firm, that people are using bitcoin to evade taxes. Companies have been found to misreport purchases of Bitcoin. The main objective of this initiative by the IRS is to pursue offenders who are not recording virtual currency transactions properly.
There are many tax implications when it comes to Bitcoin. The tax implications of Bitcoin are similar to shares of stocks, or other security asses which need to be tracked on an order by order basis. The IRS has indicated that the normal basis rules paply to bitcoins, as a result Bitcoin users have the option to sell their currency on a FIFO basis, LIFO basis, or a selective cost basis method. In a rising market, LIFO produces the lowest tax liability. FIFO is good in a falling market.
You must maintain records for tracking. Taxpayers also need to be aware of the fact that if they are paid with bitcoin for services, these coins are self-employment income and subject to self-employment tax. As a result, they must be reported.
Most bitcoin users were not aware until 2016-2017 that they were supposed to record gains and losses. Because of the John Doe summons, you are at risk for tax evasion. You could be subject to penalties for failure to comply with tax laws. Underpayments that can be traced to virtual currency transactions can also include accuracy-related penalties, and other information relating to reporting penalties. Penalty relief can be available to taxpayers, and people, who are required to file an information return.
You must reach out to an experienced attorney as soon as possible to ensure you’re prepared to respond to the IRS, if they ever audit you.
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