What To Know About Reporting Virtual Currency To The IRS
Over the last few years, various forms of virtual currency have gained prominence and found their way into investors’ portfolios. Cryptocurrencies such as Bitcoin, Ethereum, Dogecoin, and others have gone from investment hobbies for the tech-savvy to mainstream forms of currency among everyday investors. Most virtual currency investors are fairly new to the game – more than half of Bitcoin investors, for example, purchased Bitcoin for the first time in 2021.
The IRS has recognized the widespread adoption of virtual currency and put rules in place to monitor the use and transfer of cryptocurrencies and non-fungible tokens (NFTs). Virtual currency transactions in the United States are taxable by law, just as transactions in other property. Under IRS rules for virtual currency, gains and losses from virtual transactions are to be reported just as gains from standard currency and physical property.
What is Virtual Currency?
Virtual currency is a digital representation of value, available only in electronic form, that can be used as a medium for exchange of that value. In some markets, virtual currency can function just as coin and paper money would, if both transacting parties recognize its value. Users of cryptocurrency advocate for its relative ease of use and transaction speeds. Lack of government regulation is a feature that many users enjoy, but this very lack of regulation can also expose users to risks that standard currencies don’t face.
How Do I Report Virtual Currency on My Taxes?
Virtual currency sales, just like any other profitable transaction, need to be reported on your tax return. Further, when a person sells any virtual currency and recognizes a gain or loss on the sale, these capital gains or losses must be reported to the IRS. In short, the IRS considers cryptocurrency and NFTs to be “property”, just like stocks or precious metals.
IRS Notice 2014-21 specifies that the IRS treats virtual currency the same as property, and capital gains and losses need to be reported on a taxpayer’s Schedule D and Form 8949 when necessary. Your gain or loss from the exchange of virtual currency may be short-term or long-term, based on how long you held the cryptocurrency.
Buying virtual currency is not in itself a taxable event. You can buy and hold cryptocurrency as long as you prefer, and are not taxed even if the value of the asset changes over the course of the year.
Where crypto traders can get in trouble with the IRS is when they buy and sell cryptocurrency during the year, and don’t keep track of the gains realized when they sell virtual currency as a profit. The IRS looks carefully at these cryptocurrency exchanges and won’t hesitate to penalize a taxpayer that didn’t properly track their virtual property during the year.
It is advisable that anybody dealing in virtual currency of any amount maintain accurate records of all transactions – including capital gains or losses made through the transactions. You don’t want to find yourself scrambling at the end of the year to get your transactions in order at tax time.
The Tampa Criminal Defense Attorneys at Trombley & Hanes Are Here to Help Those With Tax Issues Related to Virtual Currency
Virtual currency has gone through a dramatic rise in popularity in recent years, and don’t think the IRS hasn’t noticed. These currencies and digital assets may be largely unregulated and function differently than other currencies, but they are still considered property at tax time. At Trombley & Hanes, our Tampa white collar crime lawyers can review your assets and help you determine a path forward if you run into any tax issues related to digital currency. To learn more, call our office today at 813-229-7918, or visit our firm online.