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What Cryptocurrency Owners Need to Know About Taxes and the IRS

Posted on in Taxation Law

San Jose tax compliance lawyer for cryptocurrencyThe use of virtual currencies has become more and more widespread in recent years, especially in the Silicon Valley area. Many people and businesses invest in and trade cryptocurrencies and use them to make purchases or pay employees. As financial activity in this area continues to increase, the IRS has taken note, and it is taking steps to make sure taxpayers properly report these transactions and pay applicable taxes on the income they earn and the gains of their investments. Some recent developments have shown that those who own virtual currencies will want to make sure they are meeting the requirements under the tax laws.

IRS Clarifies Reporting Requirements for Virtual Currency

Those who have begun to file their tax returns for 2020 may have noticed that a new question has been added to Form 1040 asking “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This indicates that the IRS will be monitoring these transactions and taking action to collect taxes that are owed. However, taxpayers have faced some uncertainty about exactly what types of transactions need to be reported. Recently, the IRS offered some clarification by stating that those who purchased cryptocurrencies using “real” currencies do not need to answer “yes” to this question. 

For other types of transactions, virtual currencies are treated as property. When selling or exchanging cryptocurrencies, a taxpayer will need to recognize any capital gains or losses based on their basis in the cryptocurrency (the amount paid to acquire it, including fees or commissions) and the amount they received in exchange for the virtual currency. Those who receive cryptocurrency as wages or as payment for services must treat the virtual currency as income based on its fair market value at the time it was received.

IRS Launches “Operation Hidden Treasure” to Uncover Cryptocurrency-Related Tax Evasion

IRS officials recently announced a new program that will be looking to identify and prosecute instances of tax fraud related to cryptocurrency. Operation Hidden Treasure includes a team of agents from the IRS’s Criminal Investigation division who are trained in tracking activity related to virtual currency and uncovering instances where taxpayers fail to report income from cryptocurrency transactions. Officials noted that the IRS would specifically be addressing known tax evasion schemes such as structuring transactions in amounts below $10,000 to avoid reporting requirements. By tracing and de-anonymizing virtual currency transactions, the IRS will be able to track instances of potential tax fraud or tax evasion and take action against those who have failed to meet their reporting requirements or pay the taxes they owe.

Contact a San Jose, CA Tax Compliance Attorney

If you have owned, bought, sold, traded, or exchanged cryptocurrency, you will want to be sure you have met the IRS’s requirements for reporting your income, gains, or losses. If you are concerned that you may face a tax audit or that you will be required to pay penalties to the IRS, John D. Teter Law Offices can help you determine your legal options, advise you of the best steps to take, and communicate with the IRS on your behalf. To get the representation you need when dealing with the IRS, contact our San Jose tax audit lawyer at 408-866-1810.

Sources:

https://www.forbes.com/sites/irswatch/2021/03/06/operation-hidden-treasure-is-here-if-you-have-unreported-crypto-its-time-to-get-legal-advice/?sh=20f7fc9039c9

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

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