Cryptocurrencies such as Bitcoin are becoming more popular as a form of payment and as investment. However, there has been little attention paid to how this virtual currency will be treated by the IRS until now. In fact, the IRS is taking a much closer look and has established some tax guidelines.
According to an article published in accountingtoday.com, “For federal tax purposes, virtual currency is treated as property and not currency.” They add, “The fair market value of the virtual currency on the date of receipt determines the taxpayer’s basis.”
Some businesses are actually paying employee wages in virtual currency instead of U.S. dollars.
In these cases the currency must be reported on a W-2 and is taxed at the fair market value of the digital currency. Likewise, independent contractors who are paid with virtual currency are subject to income tax and self-employment taxes based on the fair market value.
Investors also must pay attention since the tax will be based on the character of the gain or loss from the sale or exchange of the currency and whether it is a capital asset or is being held as an inventory item for resale.
Cryptocurrency is intriguing and many taxpayers are compelled to get in on a quickly rising trend. However, it is complicated terrain and any attempt to avoid including it when filing your taxes could raise red flags at the IRS.
The IRS is being used as a lure in an attempt to validate Cryptocurrency Retirement Accounts.
According to cryptovest.com, “The U.S. Commodity Futures Trading Commission (CFTC) has warned investors to be cautious of any digital currency retirement accounts that claim to be “IRS approved” or “IRA approved”. In a customer advisory issued on February 2, the CFTC referred to self-directed Individual Retirement Accounts (IRAs) in particular, explaining that these are held by trustees or custodians who may permit investments in a wide variety of assets (such as cryptocurrencies or gold), but who generally do not investigate the legitimacy of the investment or the team behind it.”
It’s tax time and the wolves are out to get as much as they can. Beware anything that sounds too good to be true.
Have a question? Contact Barry Fowler.
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