Pay your taxes on bitcoin…or
else.
Late last year, the Internal
Revenue Service persuaded a federal judge to require Coinbase, a San
Francisco-based digital-currency
wallet and platform with about 20 million customers, to turn
over customer information. Driving the IRS’s
decision was its belief that few bitcoin investors appear to
be paying taxes due on sales. The court order is one
of the agency’s first moves as it clamps down on cryptocurrency scofflaws.
By March 16, the IRS
will have data on about 13,000 Coinbase account holders who bought, sold, sent
or received digital currency worth $20,000 or more between 2013 and 2015. The
data include the customer’s name, taxpayer identification number, birth
date and address, plus account statements and the names of counterparties.
Criminal tax lawyers expect
the IRS will act on the information and high-profile cases will follow.
Some cryptocurrency holders
are now disclosing past tax lapses to avoid potential criminal
prosecution.
Bryan Skarlatos, a lawyer
with Kostelanetz & Fink with
several such cases, reminds cryptocurrency investors of the IRS’s success in
piercing the veil of Swiss bank secrecy. Since 2009, more than 56,000 Americans
who hid money in offshore accounts have paid more than $11 billion to resolve
tax issues.
“Digital currency holders
shouldn’t think they can hide from the IRS,” he says.
Smaller investors are also
feeling heat. Many traded during last year’s price spike, and tax preparers are
now asking clients routinely about cryptocurrency sales. They aren’t supposed
to sign returns with unreported income.
To be sure, the IRS hasn’t
clarified important issues on digital currencies, and these gaps leave room for
favorable interpretations.
But the gaps don’t leave
room for hiding income. With the April tax date approaching, here is important
information.
Asset
type. In 2014, the IRS issued a
notice declaring that cryptocurrencies are property, not currencies like
dollars or francs. Often they are investment property akin to stock shares or
real estate.
So if an investor sells a
cryptocurrency after holding it longer than a year, then the profits are
typically long-term capital gains. The tax rate is 0%, 15%, or
20%, plus a 3.8% surtax in some cases, depending on the owner’s total income.
Short-term gains on
cryptocurrencies held a year or less are typically taxable at higher,
ordinary-income rates. Capital losses can offset capital gains and up to $3,000
of other income a year, and unused losses can be carried forward for future
use.
If digital currencies are
held for personal use, as a home is, rather than primarily as an investment,
then profits are taxable but losses aren’t deductible. The IRS hasn’t issued
guidance in this area.
Tax
triggers. Selling a cryptocurrency for
cash typically triggers capital gains or losses. Using it to buy something like
a meal or a car also counts as a sale by the buyer, even if the recipient
accepts the cryptocurrency.
Recipients of these payments
often have taxable income as well. If a worker is paid in bitcoin, payroll or
self-employment taxes could also be due.
Cryptocurrency
trades. An exchange of one
digital currency for another—say, bitcoin for ether—is taxable, beginning
Jan. 1, 2018, because of the tax overhaul.
What about earlier swaps?
The IRS hasn’t said, but some specialists think these could qualify as
nontaxable “like-kind” exchanges.
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the underground world of nerds and criminals to become a mainstream investment,
the risk of hacks and scandals has also blossomed. What's a government to do?
The WSJ's Steven Russolillo travels the world (sort of) to see how regulators are
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Crystal Tai
Say that an investor bought
some bitcoin for $100 several years ago and exchanged it for ether last year.
Ryan Losi, a certified public accountant with Piascik in Glen Allen, Va., says the
taxpayer could reasonably treat it as a nontaxable exchange. If so, it should
be reported on IRS Form 8824.
He notes that when the ether
is sold, the investor’s “basis” in the ether would be $100, because it carried
over from the bitcoin. Basis is the starting point for measuring taxable gains.
Lot
identification. If an investor
bought bitcoin at $100, $2,000 and $15,000 and sold some of it for $14,000 last
year, what was the investor’s basis?
The rules aren’t clear.
Deloitte Tax CPA Jim Calvin advises investors selling partial lots to identify
them specifically and get third-party confirmation before the sale. “Ideally,
there would be a time stamp,” he says.
Account
disclosure. Good news: According to a
Treasury unit, investors aren’t currently required to report cryptocurrency
holdings on FinCen Form 114, known as the Fbar, which is often required for
foreign accounts greater than $10,000.
Chain-splits. These occur when a cryptocurrency branches
into two or more versions, as bitcoin
and Bitcoin Cash did last year. Investors are often entitled to new coins
as a result.
Does this right generate
taxable income? After much study, Mr. Calvin believes it isn’t taxable until
the investor claims the new coins.
Statutes
of limitations. In general, the IRS has
until three years after a return’s due date to assess a deficiency, but that
expands to six years if income is understated by more than 25%.
There are many exceptions.
Among them: The statute doesn’t start running until the return is
filed, and there is no time limit for civil fraud.
Click
here for the original article from The Wall Street Journal.