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Tag Archive for Virtual Currency

Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the Internal Revenue Service today issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 (PDF) and Frequently Asked Questions(FAQs).

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

“The IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” said IRS Commissioner Chuck Rettig. “The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”
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Confusion Abounds – What Is Virtual Currency? Issues For Your 2019 Federal Return

Annette Nellen on Virtual Currrency

Likely, most people think of bitcoin, now over 10 years old, when they hear “virtual currency.” If you look at CoinMarketCap, you’ll see over 2,000 cryptocurrencies listed with bitcoin at the top given its market value. Others at the top include Ethereum, Bitcoin Cash, Litecoin, and Monero.

Well, what makes something a virtual currency in the eyes of the IRS? This is even a more important question for this current tax filing season due to a new question on Form 1040 Schedule 1 – At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

Schedule 1 is used to report other income, such as business and rental income, as well as deductions for AGI. So a lot of people file it. According to page 81 of the 1040 instructions, if the answer to the question is “no” and you don’t otherwise need Schedule 1, you don’t need to attach it.

This question raises a lot of questions, such as:
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Virtual Currencies: Additional Information Reporting And Clarified Guidance Could Improve Tax Compliance

Government Accountability Office On Virtual Currency

According to the Government Accountability Office, these are the facts:

As virtual currencies like bitcoin grow in popularity, how can IRS be sure that people are paying relevant taxes?

IRS addressed some taxpayer questions in its 2014 and 2019 virtual currency guidance. For example, the guidance says that using virtual currency can produce taxable capital gains.

But IRS could do more to help taxpayers comply. Financial institutions already report information about investment sales to IRS and taxpayers—to make both aware of any taxable income. While some virtual currency transactions are reported, not all are. Our would improve reporting and more.

Examples of Virtual Currency Transactions that Can Produce Taxable Capital Gains

What GAO Found
Taxpayers are required to report and pay taxes on income from virtual currency use, but the Internal Revenue Service (IRS) has limited data on tax compliance for virtual currencies. Tax forms, including the information returns filed by third parties such as financial institutions, generally do not require filers to indicate whether the income or transactions they report involved virtual currency.

IRS also has taken some steps to address virtual currency compliance risks, including launching a virtual currency compliance campaign in 2018 and working with other agencies on criminal investigations. In July 2019, IRS began sending out more than 10,000 letters to taxpayers with virtual currency activity informing them about their potential tax obligations.
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Virtual Currency: IRS Issues Additional Guidance On Tax Treatment And Reminds Taxpayers Of Reporting Obligations

Cryptocurrency And IRS

As part of a wider effort to assist taxpayers and to enforce the tax laws in a rapidly changing area, the Internal Revenue Service today issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS is issuing additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 and frequently asked questions (FAQs).

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.

Read more

Virtual Currency And The IRS

Venar Ayar- Virtual Currency

Virtual currency refers to any digital currency which is only available in an electronic form and not as a physical form of money. Virtual currencies, like Bitcoin, are created by a process known as “mining,” where an individual, using powerful computers, authenticates transactions in what is known as a “blockchain,” or a ledger of digital transactions.

Virtual currencies may be traded on digital trading platforms, such as the third-party Coinbase, and can be used as a form of online payment, held as an investment, or used in loans to other individuals.

The IRS And Virtual Currencies

According to IRS Notice 2014-21, “the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”  This means, per IRS determination, virtual currencies, such as Bitcoin, are treated as property, and subject to tax regulations.

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Five Myths About Cryptocurrency Taxation

Myth No. 1

There is no need to report any gain or loss for exchanges between one cryptocurrency and another if the transaction occurred before January 1, 2018. That is not true. Every time when you sell a cryptocurrency, whether for fiat currency or another cryptocurrency (e.g. sell Bitcoin for Ethereum), you need to report the transaction and calculate gain or loss for tax purposes. Many people thought an exchange between two cryptocurrencies qualified for section 1031 like-kind exchange if it was done before January 1, 2018. Under the new tax law signed by the President on December 22, 2017, only real property qualifies for section 1031 like-kind exchange tax treatment starting 1/1/2018. However, it does not mean that cryptocurrency qualified for like-kind exchange tax treatment before the new law kicks in. There is no tax law, old or new, supports the conclusion that cryptocurrency ever qualified for like-kind exchange tax treatment. People taking such position are at risk for losing their battle with IRS.

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What Businesses Need To Know About The Tax Treatment Of Bitcoin And Other Virtual Currencies

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

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Paying Taxes On Bitcoin And Other Forms Of Cryptocurrency

With exponential gains in value and thousands of new retailers now accepting it as payment, Bitcoin has suddenly become one of the hottest discussion topics around the country. Bitcoin (BTC) is currently the most circulated virtual currency (also referred to as cryptocurrency, or “crypto”) in the world and can be exchanged for U.S. dollars, Euros, and other real or virtual currencies like Ethereum (ETH) and Ripple (XRP).

You may spend virtual currency to pay for products or services, or you may treat it like an investment or commodity and hold onto it. But how is a virtual currency like Bitcoin taxed and treated by the IRS? Do you have to pay taxes on Bitcoin? Depends on what you do with it.

  • How is virtual currency like Bitcoin handled for federal tax purposes?

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Virtual Currency Business Act Proposed Drives Droves Of Investors To Bermuda

TaxConnections, Virtual Currency Legislation

Virtual Currency Business Act Proposed In Bermuda – Regulation Of Virtual Currency Business Driving Many Investors To Bermuda

With interest in virtual currency at an all-time high, virtual currency is here to stay. Kevin Anderson of the Bermuda Monetary Authority, the financial services regulator states the Virtual Currency Business Act (VCBA) has been proposed as a “shining example” for what Bermuda can accomplish.

The Bermuda VCBA defines “virtual currency business” as the provision of the following activities: issuing, selling or redeeming virtual coins, tokens or any other form of virtual currency. This would include an ICO business on behalf of customers. The Act would also cover payment service providers, defined as: “a person whose business includes the provision of services for the transfer of funds.”

It would also cover virtual currency exchanges, virtual currency wallets and virtual currency services vendors, defined as any business providing specific virtual currency-related services to the public. The legislation also addresses the intersection of cryptocurrency and fiat, preventing fraud and market manipulation, the integrity of cryptocurrency owners, clear descriptions of the risks for prospective investors, and the Bermuda Monetary Authority BMA enforcement powers. Review the Consultation Paper at this link.

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How To Mount A Tax Defense For Unreported Crypto Income

On February 23, Coinbase, a popular U.S.-based digital currency exchange, notified 13,000 of its customers that it would be turning over their account information to the IRS. The notice was precipitated by a U.S. District Court ruling in a protracted John Doe Summons battle between the company and the IRS concerning accounts with potentially unreported cryptocurrency income.

Ultimately, the Court found that the IRS was entitled to the information.

The Coinbase summons battle is reminiscent of aggressive tax enforcement efforts pursued by the Department of Justice to ferret out U.S. taxpayers holding unreported income and assets abroad. That initiative also began with the issuance of a John Doe summons, but to a Swiss bank, UBS, for unreported foreign account information.

The IRS and DOJ then quickly expanded to other foreign banks and other countries. With the offshore voluntary disclosure program (“OVDP”) winding down, there are strong indications that the IRS will be turning its attention to unreported cryptocurrency transactions.

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Virtual Currency And Taxes – The View Of The United States Internal Revenue Service

Internal Revenue Service Notice 2014-21

Section   1. Purpose

This notice describes how existing general tax principles apply to transactions using virtual currency. The notice provides this guidance in the form of answers to frequently asked questions.

Section   2. Background

The Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction. Read more

Are Virtual Currencies Taxable?

With virtual currencies like Bitcoin becoming more mainstream in recent years, we often get asked if revenue from the sale or exchange of these digital dollars is taxable. The simple answer is, YES – income (or profit) from virtual currency transactions is reportable on your income tax return. However, because this is still a relatively new phenomenon, there are a few things you should be aware of to make sure you don’t get caught with a huge tax bill!

Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. Bitcoin is one example of a convertible virtual currency which can be digitally traded between users and purchased for, or exchanged into, U.S. dollars, Euros and other real or virtual currencies. There are currently more than 1,500 known virtual currencies. Because transactions in virtual currencies can be difficult to trace and have an inherently anonymous aspect, some taxpayers could be tempted to hide taxable income from the IRS. Read more