Bitcoin, Ethereum, Litecoin And Ripple: How Is It Taxed?
Bitcoin has jumped in popularity as the value has skyrocketed, but it has also been subject to significant fluctuation. Whether you invest in Bitcoin or another block chain cryptocurrency or just use these alternatives to buy your daily coffee, you must report it on your tax return.
At Levins Tax Law, attorney Gerard J. Levins has been resolving tax controversies for more than four decades. If you have been contacted by the IRS about Bitcoin or virtual currency reporting, get legal advice before you respond.
How Does The IRS Tax Virtual Currency?
Unlike foreign currency, the IRS treats virtual currency like property. This requires a complicated basis calculation with each transaction that can vary depending on a number of factors.
Basis is generally what a taxpayer paid for the Bitcoin or unit of virtual currency translated into dollar terms (the fair market value at the time of receipt). If the value of a Bitcoin has increased and a taxpayer sells it, they would have a taxable gain. Similarly, if demand slumps there could be a loss.
Mining virtual currency could also have tax implications and income derived from the activity if treated a business or trade would be subject to self-employment tax. It is important to keep good records for all virtual currency transactions.
Increased IRS Attention — The Next Offshore?
Failing to report income (which is a broad term) can lead to an IRS tax audit and assessment of back taxes, civil penalties and interest. Cryptocurrency/virtual currency is receiving more IRS attention. The Service has sent records requests to Coinbase and will likely continue to go after coin wallet services seeking more account holder information.
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Have questions about correctly reporting virtual currency transactions on your taxes? Worried after receiving a letter from the IRS? Set up time to discuss your situation.