Cryptocurrency: The IRS Expects You to Report It
Have you invested in cryptocurrency? Are you getting paid in cryptocurrency? If so, the IRS wants to know about it.
The IRS refers to cryptocurrency as virtual currency. Right now, the IRS is “actively engaged” in virtual currency non-compliance efforts. They’re auditing taxpayers and conducting criminal investigations.
So you should know your virtual currency transactions have real world tax implications. You could face serious repercussions if you don’t report your cryptocurrency assets.
Our tax attorneys are up to speed on cryptocurrency and its effect on your tax filings. If you deal with virtual currency, it’s imperative your taxes reflect that.
Robinson & Henry, P.C. | Denver, Highlands Ranch, Castle Rock, Colorado Springs
Schedule your free initial assessment with one of our knowledgeable tax attorneys at (303) 688-0944.
Reporting Your Cryptocurrency to the IRS
You should think of cryptocurrency as an asset or income because that’s how the IRS treats it.
Depending on what you’re doing with cryptocurrency you may have to pay income tax or capital gains taxes on it.
The IRS requires you to report the sale of property. For federal income tax purposes, virtual currency is considered property. Also, you must report any cryptocurrency you receive as a form of income or payment.
The following information comes directly from the IRS:
Capital Gains – Schedule D
Most people use the Schedule D form to report capital gains and losses from the sale or trade of property.
“If you sold, exchanged, or disposed of virtual currency (e.g. Bitcoin, Ether) or used it to pay for goods or services, you have engaged in a reportable transaction and may have a tax liability.” – IRS
Real Estate and Other Income – Schedule E
If you earn rental income or other types of cryptocurrency income, it must be reported when you file your taxes – including cryptocurrency.
“If you received supplemental income in the form of virtual currency, including income from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in [Real Estate Mortgage Investment Conduits], you may need to report this on Schedule E.” – IRS
Self-Employed – Schedule C
If you run your own business, then you’ll probably use the Schedule C form to account for how much money you made.
“If you were an independent contractor and received payment in virtual currency, you must report it in gross income. … Gross income derived by an individual from a trade or business, carried on by the individual as other than an employee, is reported on Schedule C. This constitutes self-employment income and is subject to the self-employment tax.” – IRS
Reporting the Fair Market Value
The IRS directs you to report the virtual currency you received at its fair market value, measured in U.S. dollars, on the date and time of the transaction.
What Happens if I Don’t Report Cryptocurrency?
You’ll likely get a letter from the IRS at some point. In fact, taxpayers have already begun to receive notices if they failed to report the income and pay taxes on it. They’re also being notified if the cryptocurrency was improperly reported.
The IRS isn’t messing around. Not only will you face financial penalties, you could be charged with a crime.
You could face:
- liability for back taxes
- criminal prosecution – fraud, tax evasion
Cryptocurrency Questions? Call our Tax Attorneys
If you’re working with cryptocurrency – even if you haven’t received a letter from the IRS – you may benefit from speaking with one of our tax attorneys.
Long before the IRS launched its cryptocurrency campaign, Robinson & Henry tax attorney Lucas Frei advised his clients to claim the virtual currency.
Schedule your free initial assessment online or call (303) 688-0944.
Learn More about Cryptocurrency
What the Heck is It?
Cryptocurrency sounds pretty mysterious given its name, but the concept is pretty simple: remove the middleman, like banks, and let individuals oversee their virtual currency.
With cryptocurrency, central authorities, like banks and governments, do not manage the virtual currency, accounts, or store personal information. Instead, a virtual public ledger called a blockchain tracks all transactions.
Cryptocurrency creators and proponents tout it as a secure and private currency system.
What’s a Blockchain?
A blockchain is supposed to act as a permanent, public record of all cryptocurrency transactions.
Some critics call the blockchain unrealistic, and business academics say it is years from reaching its potential. But we digress. Let’s take a look at how it is supposed to come together.
How Cryptocurrency Works
Real money is used to buy encrypted virtual “tokens” or “coins”. The tokens, or cryptocurrency, are used to buy goods and services.
Your crypto account is public, but none of your private information, like your name, is revealed.
When you use the virtual money, the blockchain reflects the transaction and there’s a record on the receiver’s account.
Right now, cryptocurrency is in its infancy. You can’t go into a big box retailer and expect to buy groceries or a TV with it.
Although, there are businesses and merchants that accept cryptocurrency as a form of payment.
Right now, though, most people dealing in cryptocurrency are investing in it.
Straight from the IRS: Cryptocurrency FAQs
How is virtual currency treated for federal tax purposes?
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
Does virtual currency paid by an employer as remuneration (payment) for services constitute wages for employment tax purposes?
Yes. Generally, the medium in which remuneration (payment) for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.
Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?
Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.
Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?
Yes. When a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.
Is an individual who “mines” virtual currency as a trade or business subject to self-employment tax on the income derived from those activities?
If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.
Will taxpayers be subject to penalties for having treated a virtual currency transaction in a manner that is inconsistent with this notice prior to March 25, 2014?
Taxpayers may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions may be subject to penalties, such as accuracy-related penalties under section 6662. In addition, failure to timely or correctly report virtual currency transactions when required to do so may be subject to information reporting penalties under section 6721 and 6722. However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.
Read the full FAQ list here.
Call us with your cryptocurrency IRS reporting questions. Our tax attorneys can help. Reach out online or call (303) 688-0944. Your initial assessment is free.