On March 23, 2018, the IRS announced that it was cracking down on online currency investments. Much like any other type of property income, Bitcoin, Etherum, and other virtual currencies involve income taxable by law. In February 2018, the IRS forced the largest of the cryptocurrency companies, CoinBase, to give up shareholder information on a whopping thirteen thousand of its investors. What does that mean for the shareholders? When they file their yearly tax forms, they now have to report to the IRS the income they received from the cryptocurrency.
Take a few leaps back to 2014. At that time, the IRS issued Notice 2014-21, which addresses the agency’s stance on the digital currency transactions for both tax preparers and taxpayers. This guideline warns that taxpayers who fail to accurately report additional income from their cryptocurrency transactions will face possible tax audits. In some situations taxpayers can be held responsible for paying interest and penalties. In the most extreme cases, failure to properly report the additional income from cryptocurrencies can lead to criminal prosecution.
What do these criminal charges look like? They involve filing a false tax return, or, worse, tax evasion. Those convicted of filing false returns can be sentenced to a three-year prison sentence and assessed fines that total a whopping $250,000. Those convicted of tax evasion could spend time up five years in prison and could also face fines of up to $250,000.
IRS Notice 2014-21 also states that, for the sole purpose of federal tax regulations, virtual currency is treated much like property. Regulations applying to property transactions also apply to the 1,500 varieties of cryptocurrency currently on the market. If you’re an investor, what does that mean for you? In simple terms, a payment earned from using any of these virtual currencies is subject to the same rules as any other payment made in property form.
In short, if you invest in any of the cryptocurrencies available today, you’ll be paying taxes on what you earn during the taxable year. With the IRS cracking down on the virtual trade of currencies, instead of facing an audit, fines, and possible jail time, it’s wise to follow the rules when it comes to reporting your cryptocurrency income. If you would like additional information on cryptocurrencies, or if you need to amend your past tax returns to account for the cryptocurrency income, give us a call at Law Offices of Christy Lee, P.C. We can help you navigate the reporting to ensure your compliance with the IRS.