When it comes to digital or virtual currencies (such as bitcoin), the IRS expects transactions to be reported. Virtual currency is treated as property by the IRS, so it’s taxable by law. Although less scrupulous users of virtual currencies may try to fly under the radar and hide their activities, not reporting these transactions carries considerable risks.
To guide taxpayers on the specific details about tax reporting their cryptocurrency activities, the IRS issued NOTICE 2014-21. Because virtual currency transactions share the same general tax principles as property transactions, you need to know that:
Neglecting the tax implications of virtual currency transactions could put you at risk for an audit and then lead to significant penalties and interest.
In more extreme situations, taxpayers could be subject to criminal prosecution for not reporting properly. For example, anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. If you’re convicted of filing a false return, you could face a prison term of up to three years and a fine of up to $250,000.
The biggest takeaways: The IRS treats cryptocurrency as property for tax purposes, so selling, spending and even exchanging it has implications related to capital gains. Similarly, cryptocurrency functions as ordinary income when used as compensation for employees or contractors.
Stay on the right side of mandatory tax reporting with all your virtual currency activities. When it’s time to handle tax reporting for your business, you can print, mail and electronically file 1099, W-2 and ACA forms with efile4Biz.com.
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