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The Tax Law Offices of David W. Klasing
Washington, D.C. Bitcoin and Virtual Currency
Washington, D.C., known for its significant political influence and historical importance, also boasts a rapidly evolving tech sector. This blend of policy-making power and technological innovation makes it a pivotal arena for virtual currencies. In the capital, where decisions can shape global finance, the integration and regulation of digital assets like Bitcoin find a unique spotlight. Here, the complex interplay between legislation, international diplomacy, and digital finance creates a dynamic environment for the growth and governance of virtual currencies, reflecting the city’s multifaceted character.
Bitcoin investors enjoy substantial opportunities for fast and splashy returns. However, such a lucrative, disruptive enterprise does not come without federal tax consequences. As federal laws and relevant tax codes are modified to account for virtual currency assets and crypto employment payment structures, we at the Tax Law Offices of David W. Klasing can help you make sense of the requirements that you may face and their implications on your tax liability.
In 2023, the Department of the Treasury and the IRS proposed comprehensive
regulations to enhance reporting requirements for digital asset transactions. The IIJA, effective December 31, 2022, introduced new reporting requirements for cryptocurrency transactions. Furthermore, although not currently reportable, FinCEN is indicating a move to include virtual currencies as reportable assets under FBAR regulations. The increased federal emphasis on cryptocurrency tax compliance has placed tens of thousands of virtual currency users in the IRS’s crosshairs, with a heightened risk of selection for a tax audit or criminal tax investigation.
If you have unreported cryptocurrency accounts or wallets, you should come forward now before it’s too late. Don’t let your uncertainty about the tax treatment of your crypto-currency transactions keep you up at night. By voluntarily reporting cryptocurrency transactions accurately, you may be able to avoid or minimize penalties (or prevent yourself from being criminally prosecuted). Work with our experienced dual-licensed Washington, D.C. Cryptocurrency Tax Attorneys and CPAs for trusted cryptocurrency tax help, including John Doe Summons-related tax audit representation and criminal tax defense representation. The exposure is even more significant for those who’ve ventured offshore with cryptocurrency. However, there’s a silver lining: taxpayers who’ve inadvertently committed tax discrepancies can often self-report through voluntary disclosure, potentially avoiding criminal tax prosecution and benefiting from reduced civil tax penalties.
Whether you’re dealing with Bitcoin, Ethereum, Litecoin, or any other virtual currency, call the tax law offices of David W. Klasing today at 1 (202) 888-3115 or schedule a reduced-rate initial consultation here, and we will successfully guide you through the record-keeping and reporting procedures required to file the required federal tax returns.
What Is Bitcoin & How does the IRS treat it?
The U.S. Treasury identifies Bitcoin as a decentralized virtual currency. It was created in 2009 by an individual or group using the alias “Satoshi Nakamoto.” It exists independently of any virtual world and can be transferred without a central bank, clearing-house, or other third-party administrator, successfully reducing transaction fees and other charges. By removing any central authority, Bitcoin gives each person the ability to directly and freely choose whom to associate, interact or exchange with.
At its core, Bitcoin is a computer code stored as a file. Users transfer it into virtual wallets on their computers or phones. Transactions are recorded using an open-source code called the blockchain to ensure security. Each transaction adds a “block” to this chain, forming a transparent public ledger. While all transactions are visible, participants’ identities remain anonymous. This blockchain mechanism verifies and authenticates every exchange and provides an intricate layer beneath the superficial facade of Bitcoin wallet interfaces.
For the purposes of federal taxation, cryptocurrencies are considered property, like a house, rather than an actual currency like U.S. or Canadian dollars. As such, you are required to keep track of all capital gains and losses associated with the selling or trading of the cryptocurrency on Schedule D of your return. While purchasing the cryptocurrency does not qualify as a taxable event, whenever you sell, exchange it for another Cryptocurrency, or use it to purchase something, a taxable event occurs. You will need to subtract the fair market value of the cryptocurrency at the time of purchase from the selling price or the value of whatever you traded it for to calculate the capital gains.
In terms of the IRS, the rate at which capital gains on cryptocurrency will be taxed will depend on how long you have held the cryptocurrency. If you owned the cryptocurrency for less than a year before selling it, the gains would be taxed at a rate equal to your income tax rate. If you held the cryptocurrency for a year or longer, the gains would be subject to a rate of up to 20 percent, depending on your income bracket. Losses can be written off on your returns up to $3,000. Note that separate rules may apply if, for example, you were paid for a service in cryptocurrency. You should always consult with an experienced tax attorney like those at the Tax Law Offices of David W. Klasing before filing any return so we can assess the particulars of your situation.
How to Report Income in Digital Assets to the IRS
When reporting digital assets like Bitcoin on your taxes, a slew of IRS forms come into play, and knowing which form to use can get complicated. If you reside in Washington, D.C., and have made transactions in Bitcoin or other cryptocurrencies, here’s what you need to know:
IRS Forms for Capital Gains and Losses:
- IRS Form 8949: This form is crucial for calculating the profit or loss from your digital asset transactions. The form must be filled out detailing each transaction, and the summary is then included in your annual federal tax return;
- Schedule D (Form 1040): After completing Form 8949, you must transfer the information to Schedule D, which explicitly summarizes your capital gains or losses. In essence, Form 8949 provides transaction-level details, while Schedule D gives an overall view of your gains or losses for the year;
- Form 709: This form is used in cases where digital assets were obtained through gifting or awards.
Reporting Wage Payments in Cryptocurrency
If you are employed and receive your salary in the form of digital assets like Bitcoin, you need to disclose the value of these assets as part of your wages. This is usually reported on Form 1040, Schedule 1, under “Additional Income and Adjustments to Income”.
Ordinary Income and Additional Forms
- Form 1040-SS: This form is for residents of U.S. territories or individuals with self-employment income who need to report Social Security and Medicare taxes, including those earning self-employment income in cryptocurrencies.
- From 1040-NR: This form is for non-residents of the United States to report U.S.-sourced income, including income generated from cryptocurrency transactions.
- Schedule 1 (Form 1040): Form 1040, Schedule 1 contains the following question: “At any time during ____ (year), did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” If you answer yes, you must report your crypto transactions in the tax return. If you answer no, you signal to the IRS that you have nothing to hide in this area. However, if the IRS feels differently (or already knows differently), you will face high-risk federal tax audits, stiff penalties, and additional taxes. Further, the IRS might view the erroneous “no” answer to the question as a willful act of tax evasion, which might leave you facing criminal charges that can carry jail time.
If you have not engaged in any buying or selling activities with Bitcoin within the year, you most likely don’t have to declare it unless some other “realization event” occurs. However, if you hold digital assets in offshore accounts, you may be subjected to Foreign Bank Account Reporting (FBAR) guidelines.
As skilled and experienced tax lawyers, we will assist you if you have failed to report capital gains from cryptocurrency on past returns and are facing the potential of an audit or criminal investigation by the IRS. Typically, if you retain us before an audit begins, we will be able to get you back into compliance with minimal penalties imposed. If the audit has already started, we will represent you with the IRS and work to get you back into compliance, potentially through voluntary disclosure, without you having to face the most severe civil or criminal tax penalties.
Call Our Knowledgeable Washington, D.C Cryptocurrency Tax Attorneys and CPAs Today
David’s renowned expertise is now accessible in Washington, D.C., at our appointment-only satellite office, merging legal and federal tax services under one roof—and at a unified hourly billing rate. We’re thrilled to unveil a flexible scheduling alternative where you can secure a four-hour flat fee meeting across any satellite location. David W. Klasing, an instrument-rated private pilot, will personally pilot the firm’s sleek and efficient Cirrus SR22 directly to any of our satellite locations to engage with you. This option must be preceded by a one-hour phone or go-to-meeting consultation to warrant incurring the travel expenses and opportunity costs of traveling to the East Coast. We have designed this service to benefit our clients, with no additional travel expenses added to your bill. Call us at 1 (202) 888-3115 or complete our online contact form today.
If you think you are exposed to being the subject of the IRS’ crackdown on cryptocurrency tax evaders, we will help you develop a legal strategy to deal with unreported cryptocurrency income. Let us get you ahead of the stiff civil and criminal penalties that are being pursued by the IRS through Operation Hidden Treasure. We will effectively remove the risk of criminal tax prosecution provided you are willing to knock on the IRS’s door before they come knocking on yours.
Note: As long as a taxpayer that has willfully committed federal tax crimes (potentially including non-reported cryptocurrency transactions) self-reports the federal tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into federal tax compliance and receive a nearly guaranteed pass on federal criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. A letter from the IRS regarding unreported Cryptocurrency does not automatically make a voluntary disclosure unavailable.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys and Kovel CPAs, our firm provides a one-stop-shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and net worth. See our Testimonials to see what our clients have to say about us!
In addition to our fully staffed 19,700 square foot penthouse office in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) California-based satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad, and Sacramento. We also have satellite offices in Las Vegas, Nevada; Salt Lake City, Utah; Phoenix, Arizona, Albuquerque, New Mexico, Austin Texas, Washington DC, Miami, Florida and New York, New York that solely handle Federal & California Tax issues.
Our Washington, D.C. office is conveniently located at:
1200 G Street, NW, Suite 800,
Washington, D.C. 20005
See our Bitcoin and Cryptocurrency Q and A Library
More Questions and Answers About Bitcoin
- What to Do When the IRS Wants My Bitcoin Trade History
- Bitcoin Tax Record Keeping
- Can I Appeal a Bitcoin Tax Determination by the IRS?
- Why does BitCoin and other types of Virtual Currency draw so much attention from the Taxing Authorities and the Federal Government?
- Where is the most current IRS guidance on Virtual Currency found?
- Should You Report Bitcoin on Your Taxes?
- What Is Bitcoin?
- How does the IRS treat Bitcoin?
- Can I Face Tax Penalties for Mistakes Made with Bitcoin?
- How Does a Business Determine Its Taxes When Paid in Bitcoin?
- Who Pays the Taxes in a Bitcoin “Mining Pool?”
- Are Bitcoin Miners Required to Pay Self-Employment Tax?
- Can Bitcoin Trading Create an Obligation to Pay Capital Gains Taxes?
- What Is Bitcoin Digital Currency and Why Does it Matter for Tax Purposes?
- What Happens if the IRS Thinks I’m Using Bitcoin to Commit Tax Evasion?
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