Cryptocurrency investments, such as Bitcoin, are on the rise. You see it on the news and in your digital feeds. The IRS sees this money as taxable and is pursuing investors who are dodging paying taxes.
What is Bitcoin?
In short, virtual currency is like real money, but as a digital representation. The most well-known include Bitcoin, which is virtual currency used to pay for goods or services or to be held as an investment. Bitcoin operates on a peer-to-peer exchange system, in which many computers are used to track and log details of every transaction. As a form of cryptocurrency, banks are left out of the mix, allowing users to remain anonymous in their transactions.
Bitcoin hasn’t always been worth so much. The cryptocurrency was created in 2009 when creator Satoshi Nakamoto mined the first block on the chain worth $.000076 per Bitcoin. That current price has come a long way, worth$17,552.67 per Bitcoin as of December 15, 2017.
This year, the IRS went after Coinbase, Inc., a large “digital wallet” company that allows users to buy, sell, and transfer Bitcoin. When the court ruled that IRS could gather data on all 14,355 Coinbase, Inc. customers, the agency discovered only 800-900 of those customers were reporting virtual currency gains on their taxes. The moral of the story? Just because your money is virtual, like Bitcoin, doesn’t mean it’s free from taxes – or from the eyes of the IRS.
Along with any currency, no matter how “virtual,” comes financial responsibility — and that includes reporting income to the correct agencies. After Bitcoin’s value hike in 2014, the IRS decided Bitcoin is to be treated as either a capital asset or item of inventory.
Bitcoin transfers are considered a “taxable event” and are subject to self-employment tax (if used as compensation for a service). Compensation of over $600 (.035 Bitcoin) is subject to the same reporting standards as any other self-employment payment, which means that the payer is required to report the payment to the IRS, and to the payee on Form 1099-MISC. The IRS will have the potential to assess large penalties on top of even larger taxes due for unreported income, particularly over a $20,000 threshold. Taxpayers: Be aware that just because your transaction is below the threshold, that doesn’t exclude you from your reporting requirement. The IRS can – and will – track an increased number of transactions through voluntary reporting and court orders to disclose transaction details.
Proper tax planning is key
Complying and properly reporting on all taxes – including Bitcoin – will allow you to avoid the severe penalties that come with under-reporting. Be proactive in your financial planning regarding digital currency to ensure you’re reporting transactions in the most beneficial way for you, avoiding unnecessary tax liability. Tax Defense Network is the go-to expert for tax filing, including cryptocurrency like Bitcoin Call now to discuss how to keep your cash from your cryptocurrency investments with a free consultation.