Virtual currency taxes are a relatively new issue. The IRS will continue to issues guidance as time passes, but taxpayers still need to properly report their virtual currency transactions, pay taxes on virtual currency income, and correct any noncompliance on previous returns.
Virtual Currency Taxes
You may owe ordinary income taxes or capital gain taxes on virtual currency income. Virtual currency is treated as property for tax purposes, but the specific treatment will depend on your situation.
If someone paid you for services using Bitcoin, then that transaction would be taxed as ordinary income. The value of the Bitcoin on the date you were paid would be included on your tax return.
If you held that Bitcoin as an investment and sold it several years later for a gain, this would likely be taxed as a capital gain. However, other situations may not qualify for capital gain treatment, so consult a tax professional when completing your tax return.
IRS Compliance Efforts
The IRS has given some guidance on the taxation of virtual currencies. Over 10,000 letters were sent to taxpayers who were involved in virtual currency transactions which may not have been properly reported for tax purposes.
These letters are meant to be educational because the virtual currency tax rules are so new. As time passes, taxpayers will have less of an excuse for failing to understand their virtual currency tax obligations.
If you have virtual currency income and don’t take action to resolve the issue, you’re at risk of the following tax problems:
- IRS tax audits
- Back taxes owed for one or more tax years
- Penalties for late payment
- The possibility of criminal investigations
You may need to amend several years of returns and pay a large tax bill to comply with the virtual currency tax laws. Payment plans and penalty relief may be useful tax resolution strategies in these situations.
Don’t expect the IRS to stop trying to collect virtual currency taxes. If you’ve received an IRS letter about virtual currency transactions, further communications may be coming, so take action to resolve the problem as soon as possible.
The Gartzman Law Firm can help you with virtual currency taxes and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.