If you own cryptocurrency, you should probably keep an eye on your mailbox. The Internal Revenue Service is cracking down on bitcoin and other cryptocurrency owners who may have improperly reported or didn’t file the necessary taxes on their digital assets last year. The government group is contacting these taxpayers by mail and recommends they review their tax filings. The IRS Commissioner says taxpayers should take this campaign very seriously, as individuals could face interest, penalties, or even criminal charges.
How The IRS Classifies Cryptocurrency
Cryptocurrency is a type of digital currency that uses cryptography (the storing and transmitting of data by coded message) for security purposes and to prevent counterfeiting. The US government does not back cryptocurrency, and traditional financial institutions typically do not hold cryptocurrency. Instead, the virtual coins are stored in an encrypted software program called a “wallet” on a password-protected digital device such as a computer or external hard drive. Common types of cryptocurrency include Bitcoin, Litecoin, Ethereum, and Zcash.
For federal tax purposes, the IRS treats cryptocurrency as property – not as currency. The cryptocurrency is not taxed outright. It’s the capital gains and losses that the owner occurs when buying, selling, or trading cryptocurrency that ultimately needs to be reported on a taxpayer’s tax return. It’s the same reporting process as the purchase or sale of stocks or any other form of property.
Recent IRS Guidance on Taxing Cryptocurrency
In October 2019, the IRS released new guidance on the proper classification and taxation of cryptocurrency. It addressed the tax liability created by cryptocurrency forks, which is when the taxpayer controls new coins in a blockchain and can spend them. The IRS also shared guidance on acceptable methods for valuing cryptocurrency and exactly how to calculate taxable gains following the sale of cryptocurrency.
In addition to releasing these guidelines, the IRS also added a new question to the 1040 Schedule 1 tax form. It asks, “at any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Virtual Currency Compliance Campaign
In 2019, the IRS launched its Virtual Currency Compliance campaign to address tax noncompliance related to cryptocurrency ownership and transactions. According to the IRS, “virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.” The IRS is actively engaged in addressing taxpayer noncompliance through a variety of efforts, ranging from taxpayer education, to audits, to IRS criminal investigations. As part of this campaign, the agency sent out 10,000 letters last fall to taxpayers suspected of misreporting digital assets. The recipients of those letters could face criminal prosecution.
Questions? Contact the Experienced Tax Law Team at Wiggam Law
You may not have received a letter from the IRS; however, the agency estimates that this issue affects millions of cryptocurrency investors and that they’re planning to send another round of written notices. If you own cryptocurrency and have questions related to taxable gains and your income tax filings, please contact the experienced tax attorneys at Wiggam Law. You can reach us by phone at 404-537-5030 or by visiting our website. Our law firm is dedicated to helping clients resolve their legal issues and putting their minds at ease.