Here is a pop quiz question: Do you need to report anything to the Internal Revenue Service about transactions or earnings in virtual currency? The answer: The IRS says “yes.”
Although it swings wildly in value, digital currency remains a realm for speculators and those who can afford to lose a lot of value quickly. Despite that, virtual currency gains more ground each year as its respectability meters up and down.
According to the IRS, “convertible” digital currency is value that can traded, purchased, and used in transactions. There are now many forms of convertible virtual currency used around the world. Currently, the most often discussed form of cryptocurrency is bitcoin, a name that has become synonymous with digital currency.
The IRS considers convertible virtual currency as property. This means reporting the gains and losses that you experience with your digital coin is similar to reporting property transactions. That said, income for goods and services received in bitcoin must be reported at the fair market value of the coin in US currency on the date the payment or income is received by you.
If your interest in bitcoin runs to mining and you earn income in virtual currency, the fair market value of that income in US dollars must be reported. Bitcoin mining is a resource-intense process of running specialized software to complete complex calculations to validate bitcoin that may—or may not—result in earned fees at the end of the lengthy process.
Document, convert, and report
Virtual currency is similar to legal currency in that it can be exchanged, transmitted, and stored electronically. It is value that can be hidden, misappropriated, and used to commit a tax crime, or file false income tax returns.
If your interest turns to bitcoin or other convertible virtual currency, be sure to take note of these fundamental tips for steering clear of an IRS audit:
- Create a paper trail of your virtual currency: Download transaction data, comma separated value (CSV) files, and be sure to keep 1099-K forms. Consider evaluating software that helps you track and accurately report bitcoin transactions for tax purposes. Employees paid in bitcoin must be provided an accurate W-2 with appropriate payroll tax issues addressed.
- Convert: Be sure to accurately report market value for the income as of the date of the payment or transaction.
- Report: Be sure to maintain accurate transaction and market value records to prepare your tax returns. If you use a tax-preparer or accountant, be sure they have the knowledge to prepare your tax returns, especially if you invest significantly in bitcoin.
Interest and investment in bitcoin continues its unstable path forward. Take the right steps to protect your finances and exposure in the event you draw the interest of an IRS civil or criminal tax investigation.
Chicago tax attorneys provide experienced help with civil and criminal tax matters
Serving international and local clients from offices in Chicago, and Cleveland, Illinois, the IRS tax lawyers at Robert J. Fedor, Esq., LLC deliver knowledgeable, confidential legal service if you face a tax controversy. Call us at 800-579-0997 or contact us online today.