The Internal Revenue Service (IRS) released an official reminder to taxpayers that they need to report any income in the form of virtual currencies on their income tax returns.
On March 23, 2018, the IRS deemed that cryptocurrency transactions are taxable by the law. Any taxpayer who does not report their virtual currency transactions can be audited and liable for penalties and interest. The IRS has outlined these guidelines in a previous IRS Notice 2014-21 issued in 2014.
The Notice 2014-21 states taxpayers should treat cryptocurrencies like capital gains or property tax. General tax principles associated with property transactions, therefore, apply to cryptocurrency transactions. Cryptocurrency wages for employees are also taxable. Cryptocurrency payments for independent contractors and service providers, however, go through Form 1099.
The release also goes to warn taxpayers the organization can audit their tax returns and they can be liable for penalties and interest for tax evasion or filing a false tax return.
The IRS’s Definition of Virtual Currency
The IRS states that a “virtual currency…is a digital representation of value that functions in the same manner as a country’s traditional currency.” The IRS openly admits virtual currency’s inherently pseudo-anonymous nature may motivate some taxpayers to hide taxable income from the organization.
The organization, however, warns taxpayers that a failure to properly report the cryptocurrency transactions can lead to criminal prosecutions. These criminal charges include tax evasion and filing a false tax return. “Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000, [while] anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.”
Accounting for Cryptocurrency Losses and Gains are ‘Confusing’
According to the New York Times, many traders feel extremely confused about properly accounting for the previous year’s cryptocurrency gains. Unfortunately, the IRS’s 2014 guidelines appear of little help. They are “complicated as heck,” said Mike Schreibman, an IT consultant. Despite the recent update, “nobody knows what’s going to happen,” said Jeanne Lowdermilk, a lawyer who undergoes cryptocurrency trading:
“But the IRS is the one agency you don’t want to mess with.”
On popular Reddit forums, cryptocurrency traders are expressing frustration about the IRS’s cryptocurrency taxation rules. Many users are exchanging different methods to try and escape their cryptocurrency tax obligations. For example, users are discussing the idea of converting Bitcoin into another coin that cannot be traced like Monero.
There is also great speculation as to how the IRS will track people down and whether the organization will implement blockchain technology to identify tax evaders. BTCManagerreported in August 2017 how the IRS was planning to use tracking software to combat tax evasion. Other users are, however, asking for further help with tax advice, especially for situations that involve cryptocurrency scams and frauds.
Unfortunately, “a lot of crypto investors are younger and don’t have a lot of experience trading stocks,” said Laura Walter, a Tokyo accountant who is also known as Crypto Tax girl on Twitter. “A lot of people are kind of shocked,” when they discover how much they owe in taxes based on their cryptocurrency trades.