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: San Jose, CA cryptocurrency tax attorney

The Internal Revenue Service (IRS) has been sending letters to taxpayers who are involved in activities that use virtual currency to complete transactions. Though sent as educational notices, these letters may indicate that a person could be subject to a tax audit. Individuals or entities may receive this type of notice if they failed to report income or failed to pay taxes on virtual currency transactions. 

What Is Virtual Currency?

Virtual currency, also known as cryptocurrency, is a digital form of money that is issued and controlled by program developers. People may accept these currencies as a medium of exchange just like U.S. currency, or cryptocurrencies may be converted into cash or other forms of virtual currency. Virtual currency is deemed to be property for federal income tax purposes.

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San Jose virtual currency tax attorneyThe Internal Revenue Service (IRS) has no plans to create a voluntary disclosure program for virtual currency similar to what has previously been offered for undisclosed foreign assets, an agency official recently said in a speech at a tax symposium.

In 2014, the IRS stated that cryptocurrencies such as Bitcoin that could be converted to traditional currencies are considered property for the purposes of taxation. Thus, a person may experience a gain or a loss when selling or exchanging cryptocurrency based on the value of the cryptocurrency at the time of the exchange. 

Because cryptocurrencies are classified as property, general taxation rules of property will apply. The sale of cryptocurrencies, the use of them to purchase goods or services, or retaining the cryptocurrencies for investment purposes generally have tax consequences, which may mean taxes will be owed.

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virtual currency, virtual currency taxes, tax audit, IRS Compliance Campaign, San Jose tax audit attorneyThe Large Business & International (LB&I) division of the IRS has announced several new compliance campaigns that signal where the IRS will allocate its audit resources. If you are a business owner concerned about the ramifications of a tax audit, it is advisable that you contact a qualified business tax attorney who can give you customized legal support. 

What is an IRS Compliance Campaign? 

The LB&I division of the IRS creates compliance campaigns in an effort to keep taxpayer examinations centered on issues. These campaigns, which are rolled out periodically, are meant to zero in on areas that present the greatest risk of non-compliance.

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San Jose, CA tax lawyer, virtual currency taxes, cryptocurrencies, taxable property, cryptocurrency transactionsIn recent months, the news has been filled with discussion of cryptocurrencies such as Bitcoin, Ripple, or Ethereum. As these virtual currencies increase in value, many people are looking to invest in them. However, even though digital currencies can be exchanged for goods or services, or paid to employees as income, they are not the same as legal tender. This has resulted in a great deal of confusion as to how virtual currencies are treated under the United States tax laws.

Cryptocurrencies, Property, and Capital Gains

“Convertible” virtual currencies that have an equivalent value in real currency and can be exchanged into U.S. dollars are taxable as property, similar to other capital assets such as stocks or bonds. In general, capital gains taxes apply when these currencies are bought or sold, including when they are converted into cash, when one type of currency is traded for another virtual currency, or when digital currency is exchanged for other property. Any gains or losses are based on the fair market value of the currency at the time it was acquired and at the time of its sale or trade. 

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