Many people are concerned about the tax implications of the digital currency bitcoin. The IRS has been saying it will issue guidance on the topic, but as of yet, no guidance has been forthcoming. Today, however, I have something to report on this topic: It turns out that Bitcoin is a taxable asset.
Last week I was invited to join a meeting with IRS representatives and other tax professionals to discuss the issue of taxation of bitcoins. There were two main issues discussed: (1) how do we value bitcoins for tax purposes, and (2) how do we treat income from bitcoins? I am happy to report that there is now consensus among the IRS and tax professionals regarding both issues.
As to valuation, it was agreed that bitcoins should be valued in U.S. dollars at the time they are received. For example, if you pay for something using bitcoins, the amount you recognize for tax purposes is the value of the goods or services in dollars at the time you acquired them. Similarly, if you sell goods or services for bitcoins, the taxable income is measured in dollars at the time of receipt of payment.
As to treatment of income from bitcoins, it was agreed that Bitcoins are taxable as an asset if you acquire more than $20,000 worth of Bitcoins
The IRS issued guidance on crypto in 2014 and it has become increasingly clear that the IRS is focusing on people who have made money from crypto.
This post will address tax issues when crypto is used as a currency and not as an investment. This post will also provide you with a Tax Calculator for your crypto so that you can quickly determine your capital gains or losses for each coin and for all of your coins.
The biggest issue with using crypto as a currency is that it is taxable. If you acquire more than $20,000 in a tax year then you must report it to the IRS and pay any taxes due. This applies to each coin separately so if you acquire more than $20,000 of Bitcoin, Ethereum and Dash then you have to report each one separately.
The subject of tax treatment for crypto currency is a hot topic among the crypto community.
The IRS has already stated that crypto is property, not currency, and must be reported as income. Many users did not report gains and losses from their crypto transactions.
The IRS has issued letters to roughly 10,000 taxpayers regarding their compliance with reporting obligations on crypto assets. The letters are either Notice 2014-21 or Letter 6173, 6174, or 6174-A. These notices are not final determinations of tax liability but rather requests for information to determine if a taxpayer has properly reported their gains and losses from the sale or exchange of virtual currency transactions or failed to report income associated with virtual currency transactions.
If the IRS does find that you underreported your income from your crypto transactions then the penalties can be substantial. The penalty for failure to file a correct Form 8949 is $50 per transaction after 40 transactions (maximum penalty $500k). The additional penalty for failure to file FBARs is $10k per account per year (maximum penalty unlimited). This can add up quickly.
If you wish to settle your account before the IRS issues an assessment then you will need to hire competent representation to negotiate a settlement on your behalf.
You may have heard a lot about crypto currency in the past year. The popularity of crypto currency has been growing as more and more people are looking to invest in this digital currency.
The IRS has been slow to issue guidance on the tax treatment of crypto currency. On March 25, 2014, the IRS issued Notice 2014-21 which provides some guidance. It is not surprising that they treat crypto currency as property because if you look at regulation 1.1001-1(e), it states that if something is not specifically classified as one thing, then it is treated as something else by default. In this case, it is treated as property by default.
This means that when you sell or exchange your crypto currency for cash or other property, then you must report the gain (or loss) as a capital gain (or loss). This also means that if you purchase goods or services with your crypto currency, then you should keep track of how much it has increased in value from when you acquired it to when you used it to purchase something else.
The Tax Office issued a draft of its guidelines for the taxation of crypto currency transactions, including bitcoin, on Thursday August 29.
While this was merely a draft and will not become law until approved by parliament, it is important that traders and investors in bitcoin understand their tax obligations.
The proposed guidelines would see the Tax Office apply similar guidelines to those applied to other currencies to crypto currency like bitcoin.
The ATO says crypto currency is a form of property, so any gains or losses made from dealing in it are subject to capital gains tax (CGT) provisions.
This means you are only taxed when you sell your crypto currency or trade it for something else – in other words, if you spend your bitcoin at a retailer then that’s not a taxable event.
The IRS has stated that it will treat virtual currency as property for tax purposes. Under this theory, the taxpayer would recognize a gain or loss when the virtual currency is sold. This gain or loss would be treated as capital in nature, and the taxpayer’s holding period (short-term or long-term) would determine whether the gain or loss is ordinary in nature (short term) or capital in nature (long-term).
What about a taxpayer who received Bitcoin for services rendered? The IRS also treats these transactions as taxable. If a taxpayer receives virtual currency from an employer as payment for services, he must include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received on his gross income. The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA).
Finally, what about a taxpayer who invested in Bitcoin and never sold it? This taxpayer would not have any taxable events until he sells his Bitcoin. At that time, he would recognize a capital gain or loss depending on whether it was sold at a profit or loss.
According to IRS Notice 2014-21, bitcoin is taxed as a property. This means bitcoin is subject to capital gains tax. The notice provides that a taxpayer who receives virtual currency as payment for goods or services has gross income equal to the fair market value of the virtual currency, measured in US dollars, as of the date that the virtual currency was received.
The notice also provides that a taxpayer who acquires virtual currency for investment will be treated as having purchased the virtual currency at its fair market value on the date of receipt. Therefore, once acquired, if you use it to purchase goods or services, you will have taxable income equal to the fair market value of such goods or services measured in US dollars at the time of receipt.
Notice 2014-21 goes on to provide that a taxpayer who generates income from mining bitcoin has gross income equal to the fair market value of the bitcoin when it is received.