Cryptocurrency Compliance and Disclosure
ABC—About Bitcoin Currency
Cryptocurrency is a decentralized, virtual form of currency that exists only in the digital world. While several types of cryptocurrencies have evolved over the past few years, Bitcoin is the oldest and most well-known cryptocurrency, having initially emerged on the market in 2009. Bitcoin, which is gaining significant popularity and market value, can be bought, sold, or exchanged much like traditional dollars or cents. However, unlike a tangible currency regulated by a central bank or governed by a national government, Bitcoin exists in a virtual state and relies on a technology known as blockchain to keep it secure and transferrable.
Taxability of Bitcoin
While the facts and circumstances of a given situation will dictate the specific tax treatment of mining, holding, or transferring Bitcoin, taxpayers should be well aware—the taxability of Bitcoin is on the radar for the IRS. Even though common parlance refers to Bitcoin as a type of “currency,” the IRS does not treat Bitcoin as regulated currency for tax purposes. Instead, according to IRS Notice 2014-21, Bitcoin is treated as property for tax purposes. As such, owners must track the difference in value between acquisition and disposition and report the corresponding capital gain or loss on their tax return.
Furthermore, because all income is subject to income taxation, one must report all income to be compliant and avoid interest and penalties. This means there could be tax implications for any of the following cryptocurrency events: receipt of Bitcoin as compensation in the capacity of an employee or independent contractor, receipt of Bitcoin through mining, or receipt of Bitcoin as a payment in the capacity of a service or retailer provider.
The IRS has taken a vested interest in using legal tools at their disposal to incite tax compliance and close what they believe to be a gap between those holding cryptocurrency and those reporting gains or losses to the IRS. In that vein, the IRS received approval from a federal court to serve Coinbase, a San Francisco-based virtual currency exchange, with a John Doe summons to obtain information about taxpayers who participated in certain types of cryptocurrency transactions during tax years 2013-2015.
If one holds cryptocurrency on a foreign-based exchange or with a foreign financial institution, then one must consider FinCen 114 (also known as “FBAR”) filing requirements as to avoid severe penalties. Additionally, the Offshore Voluntary Disclosure Program (“OVDP”) may facilitate taxpayer compliance in certain situations where taxpayers have willfully failed to disclose certain foreign financial accounts, including any holding cryptocurrency that should have been reported on an FBAR.
Let Us Help You
The team of experienced tax attorneys at alliantNational have delved into the nuances of the bourgeoning tax issues surrounding cryptocurrencies and are here to evaluate your personal circumstance and create a plan for you to achieve and maintain tax compliance.
Cryptocurrency Compliance and Disclosure Services offered by alliantNational:
- Compliance assessment
- Tax record keeping advice
- Review of gain / loss of virtual currency income
- Tax planning
- Choice of entity planning
- Penalty advice
- Assessment of and Representation in Appropriate Disclosure Program
- Foreign reporting compliance
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