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July 1, 2017


IRS continues to take taxable cryptocurrency transactions seriously

On behalf of Lawrence Brown

Taxpayers should sit up and take notice that their digital currency transactions may be subject to taxation.

On March 23, just before Tax Day 2018, the IRS issued a news release reminding U.S. taxpayers that the agency expects them to properly report cryptocurrency transactions. According to the release, a transaction conducted with Bitcoin or a similar cryptocurrency is subject to the same taxation rules as any other property transaction, so long as the particular currency is convertible to a regular government-issued currency like the dollar or the euro.

Cryptocurrency is considered property

Cryptocurrency, also known as virtual currency or digital currency, is characterized as property for federal tax purposes, according to the main IRS pronouncement on the topic from 2014. Gain or activity in digital currency will be taxable either as capital gains or ordinary income, depending on the transaction. In addition, there may be times when an informational return must be filed such as to report a like exchange.

Civil, even criminal, liability

The IRS in its latest release says that failure to properly report virtual currency activity may result in an audit and potentially civil penalties and interest. The release says that in extreme circumstances, the taxpayer may even be exposed to criminal liability for tax crimes like filing a false return or tax evasion.

These offenses can carry significant prison time and up to $250,000 in fines.

Sharon McCarthy, an attorney and commentator in the May 2018 issue of CPA Journal finds it significant that the March 2018 news release is the first time that the IRS has warned not only of potential civil penalties and interest, but also of criminal prosecution. In the release, the agency points out that the anonymous nature of digital currency should not lull taxpayers into thinking that real, taxable gain from related transactions is also out of sight.

McCarthy feels that the IRS “grace period for reporting such transactions appears to be coming to a close” and that its “patience for nonreporting seems to be running out.”

Seek informed legal advice

It is important that anyone who conducts business, makes investments or performs transactions in cryptocurrency understands whether IRS reporting responsibilities exist or whether taxes may be owed. An experienced tax attorney should be consulted to understand related ramifications and the possible legal steps that could be taken to remedy any deficit in reporting or paying related taxes.

A tax lawyer can explain if past amended returns should be filed or another kind of voluntary disclosure program be utilized, and the pros and cons of doing so.

Legal counsel should be consulted immediately should a taxpayer receive notice, such as from Coinbase, that transactions in digital currency have been reported to the IRS, or any IRS communication about this matter or about potentially affected returns.