Do You Have Unreported Bitcoin Earnings? You Could Be Hearing from the IRSSeptember 05, 2019
Attention Bitcoin and cryptocurrency holders…the IRS is seeking out taxpayers who have failed to report virtual currency transactions. Make sure you’re in compliance, you’ll face hefty penalties if not!
The U.S. Internal Revenue Service (IRS) is warning thousands of Bitcoin and cryptocurrency holders to pay their taxes, or face hefty penalties. The agency announced in late July that it will be sending thousands of letters to taxpayers who failed to report virtual currency transactions. How can you be sure you’re in compliance? We explore here.
What is Bitcoin/ virtual currency?
Bitcoin is a completely digital form of currency. It has captured the attention of many businesses because it allows for easier and more convenient online transactions. Bitcoin is only one type of virtual currency; there are about 1,500 other known virtual currencies.
What are the tax requirements for virtual currency holders?
Check out our blog, Tax Rules for Investing in Bitcoin and other Virtual Currencies. U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes, meaning general tax principles that apply to property transactions using virtual currency. This means:
- Like real estate, the sale or exchange of tokens for other goods is a taxable event
- Like stockholders, digital currency holders are required to report capital gains and losses from cryptocurrency trades
More about the warning
In an effort that began earlier July and will continue through August of this year, the IRS said it planned to send over 10,000 letters to taxpayers who have failed to report earnings from virtual currencies. The IRS hopes they can boost compliance through this warning.
Who will receive the warning?
Anyone who uses virtual assets whether for trading, investment or as a means of exchange could be receiving one of three types of letters from the IRS (Letter 6173, Letter 6174 and Letter 6174-A). Recipients of 6174 and 6174-A do not necessarily need to take any action. It is possible that one could receive one of the two letters even if he/she has met all tax requirements. Letter 6173 recipients, however, are required to take action as this letter points to evasion or another form of noncompliance. The IRS obtained names through various compliance efforts and campaigns.
What are the penalties?
There is a failure to pay penalty for late payment—0.5% of the unpaid tax amount per month. This starts from the month in which the tax was due. It is capped at 25% of unpaid taxes, but it is still a high figure. There is also a second penalty for late filing—5% of the unpaid taxes for each month starting from the month the tax was due. There would also be interest due on the late payments.
Wondering if you’re fully in compliance with your reporting obligations? Contact us. We can help you work through the requirements.