Tax season in the United States in full swing, nearing ever closer to the Tuesday, April 17th tax deadline in the country. While many Americans have already filed their taxes for the 2017 calendar year, the IRS has issued a statement to any remaining stragglers yet to report their earnings, warning taxpayers to pay close attention when reporting crypto-related earnings.
Tax law as it pertains to crypto is confusing for even the most seasoned investors, but the IRS’s statement intends to clear up some of the confusion and provide some simple guidelines to follow should a taxpayer need clarity. Citing “Notice 2014-21”, which defines cryptocurrency assets as “property” for US Federal tax reporting purposes, the IRS suggests following the same guiding principles as other property-related transactions.
The IRS asserts that in addition to reporting the gain or loss from the “sale or exchange” of virtual currencies – which also includes crypto-to-crypto trades – any payments being made using cryptocurrencies are taxable events that are required to be reported to the IRS.
Yes, something as simple as paying for a coffee with Bitcoin is considered a taxable transaction as a payment using property, according to Notice 2014-21.
The statement also reminds anyone paying employees or independent contractors in cryptocurrency must also reported via a W2 or 1099-MISC tax form.
The IRS’s reminder also warns of “consequences” such as audits, penalties, and potential criminal prosecution for anyone that fails to report taxable events generated from the buying, selling, and exchanging of cryptocurrencies. Those that chose to avoid paying taxes on cryptocurrencies could be prosecuted for tax evasion and serve up to five years in prison and suffer a fine of up to $250,000.
More information can be found on IRS.gov.
One thing is very clear: The IRS expects US taxpayers to pay taxes on their cryptocurrency transactions, and failing to do so can create risks far greater than any tax payments that may result in proper reporting.
If you need additional help in tracking your cryptocurrency transactions and reporting losses and gains properly, look into Bitcoin.tax. Bitcoin.tax lets you import trades directly from exchanges via API, establishes a cost basis for purchases, calculates gains and losses, and even generates the tax forms required for reporting capital gains taxes from the sale of property.