Over the last year the IRS has turned up the dial when it comes to virtual currency. Why is that? People around the world have become more and more interested in new ways to make money, and what better way than with virtual currency because of the lack of rules or regulations. There can’t be any harm in that right? Wrong!
What is virtual currency, exactly?
It’s digital money that came into existence in 2012. It relies on technology and isn’t held in traditional banks, so it bypasses the oversight and regulations of the national banks and government. This sounds good on the surface, but this new trend became stickier when the IRS started catching on a couple of years later.
How the IRS views virtual currency (and what it means to you)
Since 2014, the IRS began slowly issuing guidance on virtual currency. Notice 2014-21 says that virtual currency is property and is to be treated as property. What does that mean? It means that: If you get paid by a customer or employer with virtual currency, that’s income, and the distribution of new currency (aka airdrop), even if not sold, is also considered income. All of which should be reported on your tax return. And, any gain or loss on the sale or exchange of virtual currency should also be reported on tax returns, similar to stock transactions.
Not reporting this income can cause plenty of trouble. In 2018, the IRS ordered Coinbase, the largest U.S. platform for exchanging Bitcoin, to provide listings of virtual currency account holders. So if you didn’t start reporting the transactions on your tax returns previously, now the IRS knows who you are and will be reaching out.
Starting in July 2019, the IRS began sending notices to virtual currency owners that the IRS is aware of their virtual currency accounts and that they should file amended tax returns and pay back taxes. The IRS has put together a great Q&A page that is very helpful: Frequently Asked Questions on Virtual Currency Transactions. If you don’t follow the rules, you’ll be severely penalized for back taxes and you may be subject to future civil and criminal enforcement activity.
In 2020, Schedule 1 of the Form 1040 tax return includes the question: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” There is no escape.
What should you do?
In short, there’s no more “accidently forgetting” to report these types of transactions. The application of these rules can be complex. If you’re thinking about investing in virtual currency, it’s imperative that you know all the rules, regulations and tax consequences before jumping in.
How Shannon & Associates can help with virtual currency
Professional, knowledgeable assistance is vital. We can help you report past and current virtual currency transactions, and help you navigate issues with the IRS if you received a notice regarding virtual currency. If you have questions about this contact Shannon & Associates today at (253) 852-8500 or contact us and we’ll be in touch.
By Bridget Marasigan, CPA
