While most investors have been closely following the recent gyrations of the stock market, fans of cryptocurrency also have been on their own frenzied financial journey.
One bitcoin, as of this morning, was worth almost $8,433. I’d be happy with that value, but that’s less than half what the cryptocurrency was worth in mid-December. On Dec. 16, 2017, the digital currency topped out at more $19,000.
The cryptocurrency can be spent like real money — don’t email me bitcoin et al fans; it will always be just one step above Monopoly money to me — but many tax collectors worldwide consider it an investment vehicle.
That’s the Internal Revenue Service’s position.
In a 2014 notice, the IRS announced that for tax purposes cryptocurrency is treated as property. That means the Internal Revenue Code provisions that apply to property transactions apply to transactions using virtual currency.
So selling, spending and exchanging one digital currency for another (there are myriad versions) have capital gain implications. That means when you hold an asset for more than a year, it will be taxed at a generally lower capital gains tax rate of 0 percent, 15 percent or 20 percent.
But the IRS hasn’t forgotten about folks who use the digital currency like money. If you get bitcoin as compensation or by other means, it is considered ordinary income taxed at one of the existing income tax brackets, which are different for 2017 and, due to the new tax laws, 2018 tax years.
Basically, what the IRS is trying to ensure is that folks can’t switch from U.S. dollars to bitcoin or one of the hundreds of other cryptocurrencies (which for ease of reference, let’s just use bitcoin for everything; yes, it’s the Kleenex of digital currency) and escape Uncle Sam’s tax collector.
That’s even more true now that the IRS has formed a new team to track down bitcoin tax evaders.
This weekend’s Shout Out Saturday goes to Bloomberg Technology for its report on that cryptocurrency tax investigation. According to David Voreacos’ story:
“A new team of 10 investigators is focusing on international crimes. In addition to following undeclared assets that are flowing out of Swiss banks after a crackdown, it will also build cases against tax evaders who use cryptocurrency. The promise of anonymity that has drawn money launderers and drug dealers to virtual coins is also attracting tax cheats, the IRS has said.”
Don Fort, chief of the IRS Criminal Investigation Division, told Voreacos that while the tax agency hasn’t charged anyone yet, the cases will come.
“It’s possible to use bitcoin and other cryptocurrencies in the same fashion as foreign bank accounts to facilitate tax evasion,” Fort said.
Good to see the IRS try to get a bit ahead of this situation.
If you own and/or use bitcoin, you need to get tax proactive, too. As evidenced by its Offshore Voluntary Disclosure Program (OVDP) to crack down on taxable money hidden in overseas tax haven accounts, the IRS tends to be much more lenient with taxpayers who come forward on their own accord rather than those that get discovered.
By accurately reporting and paying tax on your bitcoin transactions now, you can avoid added financial penalties and possible criminal charges.
You also might find these items of interest:
- Britain backs off Bitcoin tax plan
- Countries’ takes on Bitcoin and taxes vary widely
- 3 costs of tax evasion: Countries lose more than money
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