Understanding Cryptocurrency Taxation

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I am not a lawyer, accountant or financial advisor and the information I will be presenting is for educational purposes only and does not replace the need for professional advice.

I have created this blog to share my knowledge of cryptocurrency taxation in Canada after learning about the complex and ambiguous world of cryptocurrency taxation.

I am a CPA candidate working full-time in public practice and have recently become involved with cryptocurrency taxation. My intention is to provide an understanding of current taxation laws surrounding cryptocurrencies, which will be updated when new laws come into effect or if there are any changes to what has already been written.

Cryptocurrency is a tax nightmare, and U.S. regulators have only just begun to grapple with the problem. The potential for tax evasion is just too great for it to be ignored by the IRS. While many investors would like to think that their cryptocurrency holdings are anonymous, the reality is that many cryptocurrency exchanges require users to submit identification documents before opening an account. Furthermore, some cryptocurrency exchanges will share account information with the IRS if the IRS requests it.

But the biggest reason why the IRS has started to crack down on those who have used cryptocurrencies for tax avoidance is because so many people did not report their cryptocurrency gains on their taxes in 2017. According to one popular crypto-tracking service, there were nearly 10 million transactions in 2017 that involved cryptocurrency profits of over $20,000 USD—yet only a few hundred people reported these gains on their taxes.

This means that cryptocurrency taxation is something that all crypto-investors should be paying close attention to this year. And while it’s important to stay up to date with any changing laws, there are certain general rules that you should follow when disclosing your cryptocurrency profits or losses on your taxes this year:

-Make sure you report your crypto-earnings as income.

-Understand how taxation works

The recent uptick in cryptocurrency trading has been met with increasing scrutiny from the IRS. This has resulted in the IRS sending letters to taxpayers who may owe back taxes, interest and penalties as a result of their cryptocurrency trades.

We’ve seen an increase in IRS audits related to cryptocurrencies and other virtual currencies. The IRS has been working with outside agencies to acquire data on cryptocurrency holders who are not reporting their gains properly. In fact, there are estimated to be over 1 million Coinbase accounts that may have failed to report their gains while trading cryptocurrencies.

The good news is that we can help you file all necessary forms and get your tax situation back on track. Contact us today to talk about your cryptocurrency tax situation.

The IRS has been sending out letters to taxpayers who may have failed to report their cryptocurrency gains on their taxes. Two variations of these letters exist, a CP2000 and a CP14000. The CP2000 states that you may owe additional tax if you did not report all of your income. It is also possible that you could receive a bill for late penalties and interest as well. The IRS has issued these letters in an effort to get more people to pay their taxes due to the use of cryptocurrencies.

The CP14000 is a letter mailed out to taxpayers that have transactions with exchanges or wallets who didn’t comply with the IRS summons issued in 2016 (I covered this in detail here). These people are at risk of having their accounts frozen by the IRS if they do not respond.

If you receive one of these notices, it is important that you act quickly and take them seriously. If you received a CP2000 notice, then I would recommend responding to it by filing an amended tax return and paying any tax owed. This can be done quickly and easily using software such as TurboTax or TaxAct. If you received a CP14000, then I would recommend speaking to a certified tax professional.

“The short answer is that it depends. It’s important to understand that Bitcoin is not cash, it’s not a security, and it’s not like any other type of investment you’ve ever had. 

The IRS has begun cracking down on Bitcoin tax evaders. They have sent letters to over 10,000 taxpayers this year which stated they may have failed to report income and pay the resulting tax from virtual currency transactions or did not properly report their transactions involving virtual currency.

If you’re reading this blog, hopefully you’re a cryptocurrency enthusiast and believe in its future. The last thing we want is for our readers to fear the IRS, but rather we want to educate our readers about what needs to be done so there are no surprises. 

But first, let me give you some background on why the IRS even cares about cryptocurrency…

The US Government has identified cryptocurrencies as property for tax purposes. In 2014 the IRS released notice 2014-21 which states that virtual currency is treated as property for U.S. federal tax purposes.”

Cryptocurrencies have been a popular topic this year. Hundreds of new cryptocurrencies have been created, individuals are raising millions through initial coin offerings (ICOs), and major financial institutions are exploring blockchain technology. The IRS has also taken notice of these developments and is taking steps to understand and regulate cryptocurrency transactions.

What is Cryptocurrency?

The term cryptocurrency is generally used to describe a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Cryptocurrencies like Bitcoin, Ethereum, and Litecoin are just the beginning. There are thousands of other cryptocurrencies out there, but the above three make up the majority of mainstream discussion and trading.

The U.S. Securities and Exchange Commission (SEC) announced that cryptocurrency exchanges must register with the agency. According to the SEC, cryptocurrency exchanges are considered “national securities exchanges” and thus they need to register with the SEC as a national securities exchange or seek an exemption. Currently there are only a few cryptocurrency exchanges that have registered with the SEC, but this list will likely grow in 2019.

The IRS has released new guidance on virtual currency transactions in IRS Notice 2014-21. As a result, transactions involving virtual currencies are treated as property for federal tax purposes. This means that general tax principles applicable to property transactions apply to virtual currency transactions.

The IRS first addressed virtual currency in IRS Notice 2014-21, which provided guidance on the treatment of virtual currency for federal tax purposes. In Notice 2014-21, the IRS explained that it would treat Bitcoin and other virtual currencies as property for federal tax purposes. Thus, general tax principles applicable to property transactions apply to transactions using virtual currency.

In this blog post we explore 10 important things you need to know about cryptocurrency taxation:

1. Virtual Currency is Treated as Property for Federal Tax Purposes

2. Gross Income Includes Any Income from Virtual Currency Trades or Sales

3. Virtual Currency

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