IRS Reminds Taxpayers to Report Virtual Currency Transactions

IRS Reminds Taxpayers to Report Virtual Currency Transactions (That Which is the Case; and Also the Name of the Official Reminder by the IRS)

The IRS has put out a reminder on tax responsibilities for cryptocurrency. In summary, you have to report transactions and pay taxes on selling, trading, or using cryptocurrency.

First, you should read the official IRS news release: IRS reminds taxpayers to report virtual currency transactions to get a sense of what is required.

Second, we have compiled information related to how taxes work with cryptocurrency, so please look at that as well.

In Summary:

1. You have to report cryptocurrency transactions.
2. Cryptocurrency is taxed as an investment property. Thus you’ll pay the capital gains tax on transactions. You’ll need to follow the same rules you would for trading other investment properties with a few exceptions.

For most people, this means paying capital gains on crypto, where a gain or loss is realized when you buy, trade, or use a cryptocurrency.

There are more rules than I can cover in a summary, so do make sure to check out the above links for the nitty-gritty.

To end, I’ll provide an excerpt from the official IRS document:

Notice 2014-21 provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

• A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
• Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply.  Normally, payers must issue Form 1099-MISC.
• Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
• Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
• The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

More information can be found on IRS.gov.

IMPORTANT: Make sure not to commit a federal crime by failing to report your cryptocurrency transactions. If you traded a lot of crypto, and don’t report it, you are setting yourself up for bad times. A normal person will be audited and owe fees for not reporting, but someone who moved a lot of crypto could technically be subject to criminal prosecution for not reporting. You must make a good faith effort. I’ll now quote another part of the official document. “Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest. In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.”

TIP: I do not represent the IRS and I am not a legal professional; you’ll need to consult professionals and official documents before filing your taxes.