Before You Join The Cryptocurrency Revolution, Make Sure You Know How To Report and Pay the Taxes on These Transactions. The IRS Is Looking For You.
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Earlier this year, the IRS issued a news release IR-2018-71, March 23, 2018 reminding taxpayers to properly report transactions involving virtual or cryptocurrency such as Bitcoin. For tax purposes, virtual currency is treated as property, not money. This means when you buy and sell virtual currency or use virtual currency to buy things, it is a taxable transaction on which you can recognize a gain or loss and pay tax.
More recently, the IRS Large Business and International Division announced a new virtual currency compliance campaign However, blockchain technology and cryptocurrency have grown in both popularity and complexity far faster than the IRS and other agencies can react.
IRS Notice 2014-21 , the only significant guidance on how to properly report virtual currency transactions is roughly four years old and as the senior counsel at the Treasury’s Office of Tax Policy admits, the IRS did not consider some very significant gray areas in 2014, because they just didn’t exist. “Hard forks” in which there is a change to the software of a digital currency that creates separate versions of the blockchain and “initial coin offerings,” similar in concept to an initial public offering of stock were unheard of at the time.
Treasury May Answer Some Crypto Tax Questions: Tax Management Weekly Report (BNA), 07/02/18.
Tax practitioners have expressed their concerns that the IRS is cracking down on cryptocurrencies while little or no guidance is available on many reporting issues, such as whether an exchange of one cryptocurrency for another qualifies as a like kind exchange.
Guidance Lacking as IRS Launches New Crypto Auditing Campaign, Accounting Policy & Practice Report (BNA), 07/06/18.
Despite a lack of guidance on several significant reporting aspects of cryptocurrency transactions, the IRS is, nevertheless, initiating a new “compliance” campaign to ensure it collects all taxes it believes are currently going unreported. Therefore, if you are trading or using Bitcoin or other digital currency, consult with a tax professional to make sure you are complying with what little guidance is currently available. Welcome to the revolution!