Understanding Taxes on Virtual Currency

 Posted on April 11, 2018 in Taxation Law

In recent months, the news has been filled with discussion of cryptocurrencies such as Bitcoin, Ripple, or Ethereum. As these virtual currencies increase in value, many people are looking to invest in them. However, even though digital currencies can be exchanged for goods or services, or paid to employees as income, they are not the same as legal tender. This has resulted in a great deal of confusion as to how virtual currencies are treated under the United States tax laws.

Cryptocurrencies, Property, and Capital Gains

“Convertible” virtual currencies that have an equivalent value in real currency and can be exchanged into U.S. dollars are taxable as property, similar to other capital assets such as stocks or bonds. In general, capital gains taxes apply when these currencies are bought or sold, including when they are converted into cash, when one type of currency is traded for another virtual currency, or when digital currency is exchanged for other property. Any gains or losses are based on the fair market value of the currency at the time it was acquired and at the time of its sale or trade. 

Payments made using digital currency are treated the same as a payment made in property. If employers pay their employees in virtual currency, these wages are subject to income tax withholding and must be reported on an employee’s W-2 form. Payments of virtual currency to independent contractors are subject to self-employment taxes and must be reported using Form 1099-MISC.

Taxpayers who “mine” cryptocurrencies and receive these currencies in return for validating transactions must report these receipts as part of their gross income. Any payment made using virtual currency that is worth at least $600 is subject to information reporting to the IRS. 

Contact a San Jose Tax Attorney 

As the use of digital currencies increases, the IRS is paying close attention to these transactions and the IRS has stated that it is prepared to prosecute those who do not properly report their income or pay taxes on virtual currency transactions. Failure to properly report gains from the sale of virtual currency could result in criminal charges of tax evasion and filing a false tax return. Consequences include a prison sentence of up to five years and a maximum fine of $250,000. 

If you need help understanding how to report your cryptocurrency transactions, John D. Teter Law Offices can answer your questions and help you minimize your tax consequences. For assistance with these or other tax issues, contact a San Jose, CA tax lawyer today by calling 408-866-1810.

Sources:

https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions

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

https://cryptocurrencyfacts.com/2017/12/30/the-tax-rules-for-crypto-in-the-u-s-simplified/

https://www.forbes.com/sites/kellyphillipserb/2018/01/09/what-you-need-to-know-about-taxes-cryptocurrency/#7da8cb58605f