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How Virtual Money Can Cause Real Tax Damage: What to Know About Bitcoin Taxes

October 10, 2018

What You Need to Know About Bitcoin Taxes

Only 802 tax returns of the 132 million tax returns filed electronically in 2016 reported cryptocurrency. Have you reported your bitcoins?

Check for these five qualities to make sure your tax pro is qualified and the best for you.

Bitcoins: they’re so hot right now. You’ve heard all about this type of cryptocurrency (or virtual money) investment. People are raving about how much Bitcoin value has grown since its start. They can’t stop talking about how this interesting cryptocurrency phenomenon could be changing our economic landscape. Amidst all the sensationalized information about Bitcoin, there’s one thing that has gone unspoken for too long: Bitcoin taxes. Here’s what you need to know about these wild digital coins and what implications they could have for your taxes.

What is a bitcoin?

Bitcoins are a virtual currency, which means there are no physical bitcoins. You can use bitcoins to pay for goods or services or to hold as an investment. Bitcoins operate on a peer-to-peer exchange system. This involves using computers to track and log details of every transaction. Like any cryptocurrency, bitcoins are not issued or backed by any banks or governments, so transactions allow users to remain anonymous. Even though it’s not legal tender per se, Bitcoin has seen huge surges of popularity and sparked the creation of other forms of cryptocurrency.

How much is a bitcoin worth?

When bitcoins first came out in 2009, they were worth next to nothing. The first price increase happened in 2010 when bitcoins jumped from $0.0008 to $0.08 for a single bitcoin. Since then, its price and trading history have been very volatile. Most recently, it has seen a high of $17,900 per bitcoin in Dec. 2017, which was followed by a quick, dramatic decrease to $5,900 in Feb. 2018. Upon publishing this blog post, bitcoins are at about $6,500. The current price can be found here.

So why does the IRS care about bitcoins?

Bitcoin’s burst in popularity has lead to an explosion of billions of dollars in wealth. And the federal government is concerned that they’re not getting their cut. So in 2014 after a huge Bitcoin value hike, the IRS announced that they view bitcoins as property, which means that any tax rules that apply to property transactions also apply to transactions involving Bitcoins.

Interestingly enough, only 802 tax returns of the 132 million filed electronically in 2016 reported cryptocurrency income. So there are many people dabbling in bitcoin who are not reporting these transactions to the IRS. The federal government is not pleased and is determined to regain any Bitcoin taxes.

Why should I care about Bitcoin taxes?

In 2017, the IRS went after Coinbase, Inc., a large “digital wallet” company that allows users to buy, sell, and transfer Bitcoin. The court ruled that the IRS could gather data on all 14,355 Coinbase, Inc. customers. Since only 802 electronically filed tax returns in 2016 reported cryptocurrency, the majority of those 14,355 customers didn’t report their bitcoins. With this data in hand, the IRS will be following up with any Coinbase customers.

What could happen if I haven’t paid taxes on my bitcoins?

If you were a Coinbase customer and you haven’t paid taxes on your bitcoins, you should expect a letter in the mail from the IRS (if you haven’t gotten one already). This letter could be a notice of deficiency, to inform you that you haven’t paid enough on your taxes because of your bitcoins.

The IRS wants what they’re due. Besides looking to regain any Bitcoin taxes, they are also trying to find intent to prove tax evasion in people who didn’t report their bitcoins. And if they find you guilty of tax evasion, you could end up in jail. And while Bitcoin may be trendy right now, prison stripes are never cool. So make sure you pay back the IRS what they’re owed and continue to correctly report your bitcoins and other cryptocurrencies.

The moral of the Bitcoin taxes story

Just because your money is virtual doesn’t mean it’s free from taxes – or from the eyes of the IRS. The federal government wants more compliance but may run into issues taxing all bitcoin gains since lots of trading is done on overseas exchanges. Still, reporting on your cryptocurrency isn’t optional. There may not be the same regulation around reporting on bitcoins as there is around reporting stock sales, but it’s still the same concept. It’s still income and as such, the IRS needs to know about it.

If Bitcoin taxes have you scratching your head, you can always consult a tax professional who has experience with cryptocurrency to help you figure out the next steps.

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