Compliance With IRS Requirements Regarding Virtual Currency

 Posted on July 18, 2018 in Taxation Law

Over the last few years, more and more people have begun to invest in virtual currencies such as Bitcoin, use them to pay for goods and services, and exchange them with others. However, even though the use of cryptocurrencies has increased, many people have not been properly reporting these virtual currencies on their taxes. In fact, out of the 132 million electronically filed tax returns in 2016, only 802 reported virtual currency income. This activity has not escaped the notice of the IRS, and the agency is looking to enforce tax laws on virtual currencies.

IRS Compliance for Cryptocurrencies

The IRS’s Large Business & International (LB&I) division recently identified virtual currencies as one of five new compliance campaigns it will be conducting. The LB&I division will begin using outreach to educate taxpayers about their requirements for reporting income from virtual currencies, as well as examinations (audits) of taxpayers who do not correctly report income.

The IRS has stated that cryptocurrencies are considered property, and the same general tax principles apply to transactions involving virtual currency as for other types of property. This means that taxpayers who receive payments of virtual currency in return for goods and services (including income paid by an employer) must use the fair market value of the virtual currency at the time it was received when computing gross income.

In addition, a taxpayer who exchanges cryptocurrency with someone else must report capital gains or losses if the value of the virtual currency increased or decreased in the time between when the virtual currency was acquired and when it was exchanged with another person. Payments made to others using cryptocurrency must be reported if the value of the virtual currency is at least $600 at the time of payment.

While the IRS has created voluntary disclosure programs for certain compliance campaigns, it currently has no plans to create this sort of program for virtual currency. The IRS is encouraging taxpayers who have not reported transactions involving cryptocurrency to file corrections of their tax returns to ensure that they are in compliance with tax laws.

Contact a San Jose Tax Compliance Lawyer

If you have purchased, sold, or exchanged Bitcoin or other types of virtual currencies in the past few years, you should be sure that you have properly reported these transactions on your tax returns. If you have any questions about how your activity involving cryptocurrency affects your tax obligations, the potential penalties you may face for failure to report these transactions, or how to become compliant with IRS requirements, contact a San Jose tax law attorney today. Call John D. Teter Law Offices at 408-866-1810 to schedule a consultation.

Sources:

https://www.irs.gov/pub/irs-drop/n-14-21.pdf

https://www.forbes.com/sites/kellyphillipserb/2018/07/09/cryptocurrency-s-corporations-make-list-of-new-irs-compliance-campaigns/#562be30c597c