Reporting Virtual Currency Transactions
With the advent of virtual currency, also known as digital currency, preparing income tax returns has become a bit more complicated. This is because, like transactions in any other kind of property, income from virtual currency transactions is both reportable and taxable. Those who fail to property report these types of transactions can be audited and later held liable for penalties and accumulated interest, so if you own virtual currency, it is critical to speak with an experienced tax attorney who can ensure that you report it as required and are not penalized by the IRS.
What is Virtual Currency?
Virtual currency is a digital representation of value that functions in the same way as paper or coin currency, in that it can be used to purchase goods or services, or as an investment. When virtual currency acts as a substitute for “real” money, it is referred to as convertible, one of the most common examples of which is Bitcoin. Bitcoin, which like all types of virtual currency, is digitally traded and can be bought for or exchanged into other types of real or virtual currencies.
Using this type of currency for online transactions has become more and more popular. In fact, it is estimated that there are now more than 1,500 virtual currencies being utilized worldwide. However, although it is “digital” in nature, this type of currency, like other recognized forms of currency is considered property for the purposes of calculating and paying federal taxes.
This comes with a number of important implications, including that:
- Payments made with virtual currency are subject to the same reporting requirements as payments made with other forms of property;
- Virtual currency payments made to independent contractors are taxable;
- Wages paid in this form of currency are taxable to the employee, must be reported on a W-2 by employers, and are subject to both payroll taxes and income tax withholding;
- Third parties who handle payments of virtual currency on behalf of merchants who accept this form of payment from customers must report payments by completing 1099-K forms; and
- Calculating gains and losses from the exchange or sale of digital currency is based on whether the currency is a capital asset.
Although virtual currency may be a good investment and makes online transactions simpler, it also creates a host of unique tax-related issues. For example, taxpayers who collect payment for goods in the form of virtual currency, must include that payment when calculating gross income, which also requires a calculation of the fair market value of that currency.
Failing to Report Virtual Currency
In most cases, taxpayers who fail to report virtual currency face fees and interest payments. In extreme cases, where a substantial amount of income is at stake, taxpayers could face criminal charges of tax evasion or filing a false return. These offenses are punishable by fines of up to $250,000 and imprisonment for between three and five years.
Contact Our Legal Team Today
For help reporting your own virtual currency transactions, please call dedicated and experienced Florida tax attorney Ronald Cutler, P.A. at 386-490-9949. Initial consultations are conducted free of charge.