What is the Voluntary Disclosure Program?

The voluntary disclosure program allows taxpayers who have committed past tax crimes to be brought back into compliance in almost all cases without facing criminal tax charges. The key is that you must disclose your fraudulent behavior and correct the returns before the IRS opens an audit or a criminal tax investigation into your returns. At the Tax Law Offices of David W. Klasing, our skilled Tax Lawyers and CPAs have years of experience successfully guiding our clients through the voluntary disclosure program and bringing them back into compliance. In fact, at times, our voluntary disclosure work has accounted for 80% of our book of business.

Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed returns coupled with affirmative evasion of payment) self-reports the 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 tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.

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 in 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 a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs, our firm provides a one-stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

To set up a consultation, call us today at (888) 637-7690 or schedule online at your convenience.

Voluntary Disclosure and the Crypto Wash Sale Rule

The concept of wash sales, well-known in the realms of stocks and securities, is emerging as a point of discussion in cryptocurrency transactions. A wash sale typically occurs when an investor sells an asset at a loss and quickly repurchases the same or a similar asset to reap tax benefits. Currently, the IRS’s wash sale rule, which prevents claiming tax losses in such situations for stocks and securities, does not explicitly apply to cryptocurrencies, which are classified as property.

As of 2023, the absence of a specific crypto wash sale rule presents a gray area for investors. While technically legal at present, the practice of executing crypto wash sales poses a risk, given the increasing scrutiny of the IRS and the potential for future regulatory changes. The Biden administration’s heightened focus on cryptocurrency cases suggests that the loophole allowing crypto wash sales might soon be closed.

In this evolving regulatory environment, the voluntary disclosure program becomes particularly relevant. Taxpayers who have engaged in crypto wash sales, under the assumption that these transactions were not subject to the wash sale rule, might find themselves at risk if the IRS decides to alter its stance. The voluntary disclosure program offers a pathway for taxpayers to amend past tax returns and rectify any non-compliance preemptively.

This proactive approach is especially prudent for those who have engaged in frequent buying and selling of cryptocurrencies, as it mitigates the risk of penalties and interest that could accrue if the IRS retrospectively applies a crypto wash sale rule. It highlights the importance of staying informed and compliant with IRS regulations, even in areas currently deemed as gray.

What does the IRS Consider “Cryptocurrency?”

Cryptocurrency is a type of virtual currency that can be traded and transferred directly from person to person, such that transactions involving this type of currency do not need to go through a centralized bank or financial institution. As such, transactions can be both safe and anonymous, and users avoid having to pay bank and transfer fees. The “cryptocurrency” itself, the most popular type of which is Bitcoin, is just a piece of code that exists as a secure computer file powered by an open-source code known as the blockchain.

Blockchain is a type of virtual ledger that keeps track of all the individual transactions involving each unit of virtual currency. The “blocks” are the individual transactions that make up the “chain” of the underlying code. Most forms of cryptocurrency were designed with an artificial scarcity in the model. For example, no more than 21 million bitcoins will ever exist. This has made these investments attractive for those looking to diversify their portfolios in recent years. Also, companies are slowly beginning to accept Bitcoin as a form of payment, and some employers are even paying their workers or offering bonuses in Bitcoin.

How Do Taxes on Cryptocurrencies Work?

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.

Tax Implications of Emerging Digital Assets

Non-Fungible Tokens (NFTs), a once-obscure digital asset class, have rapidly ascended to prominence, capturing the attention of both the public and tax authorities. In 2021, the NFT market experienced explosive growth, skyrocketing from a capitalization of $91 million at the start of the year to an estimated $30 billion in sales. This unprecedented surge has led experts to predict that the NFT market could expand to $80 billion by 2025 and approach $350 billion by 2030.

NFTs are unique digital assets, often recorded and transferred on a blockchain. They can represent a diverse range of items, from digital art and trading cards to tokens in the metaverse or proof of ownership. Their value, intrinsically tied to what buyers are willing to pay, is determined in a marketplace where NFTs are typically sold for cryptocurrency.

IRS Focus on NFTs as Collectibles

The IRS has particularly concentrated on whether certain NFTs should be taxed as “collectibles.” This approach differentiates NFTs into two categories: the digital file itself and the property or rights it provides access to. The IRS’s Notice 2023-27 outlines this dual nature of NFTs, focusing on the item or right that the digital file represents. This notice is pivotal, as it signifies a cautious governmental approach to providing guidance on digital assets and acknowledges that some forms of IRS sub-regulatory guidance must adhere to the Administrative Procedure Act.

For taxation purposes, if an NFT certifies ownership of a traditional collectible, such as a gem, it is taxed as a collectible. Conversely, NFTs linked to non-collectible items, like virtual land in the metaverse, are not considered collectibles for tax purposes.

Implications for Retirement Accounts and IRAs

The tax treatment of NFTs becomes particularly significant in the context of retirement planning. Under Code Sec. 408(m)(1), purchasing a collectible with an individual retirement account (IRA) or individually directed account results in a taxable distribution equal to the cost of the collectible. This regulation directly impacts IRAs and qualified retirement plans that invest in NFTs classified as collectibles, triggering a taxable distribution.

Further complicating matters, the Department of Labor has issued cautionary guidance on the risks of cryptocurrencies in 401(k) plans. However, this guidance does not explicitly extend to IRAs, which have seen a rise in offering digital assets as investment options. The popularity of self-directed IRA products that include cryptocurrencies necessitates careful analysis under Code Sec. 408(m) and Notice 2023-27.

Understanding the IRS’s current stance on NFTs as collectibles and the implications for retirement accounts and IRAs is crucial.At the Tax Law Offices of David W. Klasing, our dual-licensed Virtual Currency Tax Attorneys and CPAs always stay ahead of IRS guidelines regarding NFTs as collectibles, especially considering their impact on IRAs and retirement planning. Our focus is on ensuring clients are well-informed and compliant with these evolving tax regulations in the digital asset landscape.

Understanding Hard Forks and Airdrops in Cryptocurrency Taxation

What is a Hard Fork?

A hard forkin the realm of distributed ledger technology, such as blockchain, is a significant event. It occurs when a cryptocurrency undergoes a protocol change, leading to a permanent split from the original blockchain. This results in the creation of a new cryptocurrency on a separate ledger while the original continues on the existing ledger. Hard forks are pivotal moments in cryptocurrency, often reflecting major shifts or updates in the technology or philosophy underpinning the currency.

Forks can occur for a variety of reasons, but most are commonly related to disagreements among the crypto-currency community about the way that transactions should be validated. When a group of miners decide to alter their software to reflect such a change, a fork occurs. After a fork, an owner of that particular crypto-currency has ownership in the currency along the historic blockchain and the new chain caused by the fork. For instance, some Bitcoin Core (commonly referred to as plain “Bitcoin”) miners altered their software, and the resulting hard fork created Bitcoin Cash. Immediately after the hard fork, a person who owned one Bitcoin also owned one Bitcoin Cash.

The particularity of the hard fork and the way in which a crypto-currency owner holds their digital currency play a role in determining the tax consequences. It is in your best interest to contact a tax attorney with experience in representing taxpayers who invest in Bitcoin and other digital currencies. Any uncertainty regarding a cryptocurrency tax position (our firm has identified several) should be adequately disclosed on the return, taking the uncertain tax position to avoid penalties, but this could result in an audit.

Airdrops and Their Tax Implications

An airdrop is another crucial concept in cryptocurrency. It involves distributing units of a cryptocurrency to multiple ledger addresses, often as part of promotional or reward schemes. When a hard fork is followed by an airdrop, it leads to the distribution of the new cryptocurrency to holders of the original currency.

The tax implications of receiving cryptocurrency through an airdrop are nuanced. Generally, the recipient is considered to have received the cryptocurrency at the time it is recorded on the ledger. However, the actual control, or “dominion and control,” over the cryptocurrency is a key factor. If a recipient cannot exercise control over the airdropped cryptocurrency (for instance, due to limitations of the exchange or wallet where it is held), then they are not considered to have received it for tax purposes until such control is established.

Taxpayer’s Control and Receipt of Airdropped Currency

For tax purposes, the moment a taxpayer gains the ability to transfer, sell, exchange, or dispose of the airdropped cryptocurrency is crucial. This is the point at which they are treated as having received the cryptocurrency, with corresponding tax implications. For instance, if the cryptocurrency is airdropped to a wallet on an exchange that does not support the new currency, and the taxpayer later gains access to it, the point of taxation is when they gain access, not when the airdrop initially occurred.

As these events can have significant tax consequences, it is essential for taxpayers dealing with cryptocurrencies to be aware of these occurrences and understand their tax obligations accordingly. Our dual-licensed Virtual Currency Tax Attorneys and CPAshave extensive experience representing taxpayers from all walks of life in a variety of tax situations. Don’t let your uncertainty about the tax treatment of your crypto-currency transactions keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.

How Can A Skilled California Cryptocurrency Tax Attorney and CPA Assist Me with Matters Related to Virtual Currency?

As noted earlier, our skilled tax professionals at the Tax Law Offices of David W. Klasing offer the unique perspective of being both licensed attorneys and certified public accountants. Our CPA training can help us to reconstruct past records and set up a system for you to record the detailed information required on your tax return regarding the buying and selling of virtual currencies, including the aforementioned need to keep track of the fair market value of the cryptocurrency on the date you purchased it. We can use these records to help calculate your capital gains and losses for the year from the buying, selling, and trading of cryptocurrency and to assist you in filling out your returns in a complete and timely manner. Our legal background will give us the skills needed to be sure nothing we do exposes you to civil fines or criminal liability.

As skilled and experienced tax lawyers, we can also 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 penalties.