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The IRS is sending out letters to Virtual "Crypto" Currency account holders

 

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or cryptocurrency. In late 2017 Bitcoin reached a value as high as almost $20,000 per coin. Bitcoin is off to a hot start in 2020, and the IRS is becoming much more aware of all not just Bitcoin, but all forms of Virtual "Crypto" Currency. It's important to stay a float on the latest updates and news with government officials regarding this if you are trading any forms of virtual currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. 

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact

The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.

When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee.

When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients.

IRS Letters

The IRS launched its main compliance efforts in June 2019 by sending out one of 3 letters to various cryptocurrency holders with large cryptocurrency accounts (generally greater than $20,000). The IRS obtained the information for over 20,000 individuals from the popular crypto-trading platform Coinbase.

    1. Letter 6173: Most severe: IRS has alleged information that the taxpayer has not met cryptocurrency reporting and taxation requirements. Requires either amending the return to include cryptocurrency transactions or arguing by mail or eFax that the taxpayer complied with all laws and regulations.
    2. Letter 6174: IRS provides general information to the taxpayer. Does not require a response to the IRS. File an amended return if necessary. Least severe.
    3. Letter 6174-A: IRS has alleged information that taxpayer has not properly reported cryptocurrency transactions. No response to letter required. Taxpayer should file amended return if necessary.

There is no specific cryptocurrency form or schedule. Cryptocurrency transactions would be reported on pre-existing forms (ex: Form 8849 for sale/trading of cryptocurrency) like any other transaction, but noted as cryptocurrency. Sufficient records for cost basis should be kept, as price data for cryptocurrencies can vary based on the platform used.

There is also a mandatory yes or no question on Schedule 1 stating "At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency". It is important for you to answer this question to avoid any speculation from the IRS. 

If you have any questions, feel free to contact us!

Chris Boyer, EA

 

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