IRS Virtual Currency Taxes Reminder
With the CFTC getting support from the federal courts that virtual currency is a commodity and SEC regulating them as securities, it’s easy to forget the yearly IRS reminders since 2014 that cryptocurrency transactions should be reported like any other property. Four years ago on March 23, 2014 the IRS issued a notice answering questions on Bitcoin and other cryptocurrency. The agency stated that even when cryptocurrency operates as “real” currency, it is still not a legal tender.
“The notice provides that virtual currency is treated as property for U.S. federal tax purposes.”—Internal Revenue Service
The Q&A was released in Notice 2014-21 describing how existing tax laws apply to cryptocurrency transactions. The notice summarizes that the sale or exchange of cryptocurrency, “has tax consequences that may result in a tax liability.” In a reminder today, the IRS restated it may be taxable as a property.
The original reminder sent today reiterated that if not property reported, cryptocurrency transactions can be audited and can be liable for penalties and interest. The warnings outlined in issue number IR-2018-71 can be found below:
“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.
Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. There are currently more than 1,500 known virtual currencies. Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS.
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 [it] is a capital asset in the hands of the taxpayer.
More information can be found on IRS.gov.”