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The IRS says Bitcoin and other digital currencies are considered the property of tax purposes. This may seem simple, but it is not the case, and this complexity can have considerable effects. For example, if you use Bitcoin to pay something worth $ 500, what does the IRS say? You have just sold your Bitcoin. You have a gain or loss on the sale, based on how much you paid for the Bitcoin, and how much it's worth when you sold (likely about $ 500).
Is this gain ordinary or capital? short or long term? It all depends on the circumstances, so buying this $ 500 item with Bitcoin can get messy. Meanwhile, the IRS is trying to crack down on the reports because very few people seem to report their transactions. The IRS uses quotes from John Doe to obtain data on Bitcoin and other digital currency users, as recently announced the Coinbase case.
IRS Chases Cheats
The IRS even chases the identities of Bitcoin users with software. This can make you fear that you may owe taxes, penalties and interest. In extreme cases, the IRS could pursue the cases criminally. However, a bipartisan bill, The Cryptocurrency Tax Fairness Act 2017, was introduced in the House by Representative Jared Polis (D-Co) and Representative David Schweikert (R-Az). He is asking for a tax exemption for transactions of less than $ 600
If passed, it will provide tax relief in smaller, daily transactions. Remember, the IRS announced in the Notice 2014-21 that Bitcoin and other digital currencies are owned for tax purposes, no currency. Whenever you use digital currency, a taxable event is in progress.
A payment made using virtual currency is also subject to Form 1099. Salaries paid to employees who use virtual currency are taxable, must be reported on a W-2 form and are subject to deductions from 39, federal tax and social security contributions. This can mean paying the employee money and a bit of bitcoin, and taking federal cash payment deductions.
Virtual payments in foreign currency to independent contractors are taxable, and payers must issue Form 1099. This form must be completed The value of Bitcoin in dollars at the time of payment, which means that the valuation fluctuations can have brutal tax consequences. Therefore, under the proposed tax bill, any transaction of less than $ 600 would be completely exempted
The adoption of this law would mean not having to worry about keep track of gains on small transactions. In addition, the proposed law calls on the Treasury Department to provide guidelines for the reporting of profits and losses related to digital currencies. As the IRS and Coinbase continue to save on user records, it should be remembered that the IRS used a John Doe summons to obtain the names of Swiss bank account holders at UBS
. John Doe
As a result, offshore banking has changed forever, with all other Swiss banks finally setting records. In the case of IRS offshore banks, the IRS has ended up raising more than $ 10 billion. Some people say that the IRS's efforts on digital currency could end up following the same type of pattern.
In this sense, for digital currency users and investors, the change is coming. The IRS claims that only 802 people reported a Bitcoin-related capital gain or loss in 2015.
This suggests that most of the Bitcoin transaction is not reported. In 2017, there could be more transactions and more awareness, and more fear. The estimated value of the cryptocurrency economy is in the order of $ 162 billion.
With millions of transactions and the meteoric rise of Bitcoin from less than $ 100 to over $ 6,000 in a few years, the IRS is getting ready. Another effort of the IRS application involves software. The IRS has contracted with a company called Chainalysis to identify owners of digital wallets. From there, match transactions and tax returns is not so difficult.
Taxpayers who have hidden revenues from Bitcoin and other digital currency sales could face taxes and potentially heavy civil penalties. Some cases could even end up as criminal tax cases. So, at a minimum, you want to start tracking and reporting in the future.
You may also want to change the statements for the past. Any attempt at correction after the IRS contacts you is rarely as good as you do it yourself. Of course, some digital currency users have already reported their digital currency transactions in their tax returns.
But how do you know if you are doing it right?
Doing it Right
Record keeping and determination of gain and loss can be dizzying. If this bill is passed, many transactions would be in the clear. This would be good news for the digital currency community. Until then, here are some other tips.
What is the fair market value of digital money? If it is publicly traded and the exchange rate is established by the supply and demand of the market, convert it to US dollars at the exchange rate.
If you receive a virtual currency, do you include its fair market value in income? Yes, declare the fair market value in US dollars on the date you receive it
What is the basis of the virtual currency received in payment for goods or services? The fair market value in US dollars at the reception
If you "extract" the virtual currency, do you have income from mining? Yes, when you extract it, the fair market value is the income
Is the extraction of virtual currency a trade or activity that subjects you to the tax on self-employment? You bet. The IRS gets a piece of almost everything.
Robert W. Wood is a tax lawyer representing clients around the world at Wood LLP, San Francisco (www.WoodLLP.com). He is the author of many tax books and frequently writes about taxes for Forbes.com, Tax Notes and other publications. This article is adapted from an article appearing on Forbes.com. This discussion is not intended as a legal opinion and does not necessarily represent the views of Cointelegraph.