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.
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.
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