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Cryptocurrency/Bitcoin tax law 101

Table of Contents

    Curious about what the landscape for cryptocurrency and Bitcoin tax law looks like? We’ve created a visual representation of the basics for you, here in one place:

    Reporting cryptocurrency on your taxes

    • Cryptocurrency and Bitcoin users must report income, both domestic and foreign, from all digital currencies
    • Cryptocurrency and Bitcoin users may also need to file an FBAR
    • When trading virtual currencies yields capital gains, you must pay taxes on those gains; the rate is determined by how long you hold the cryptocurrency
    • Short-term capital gains on cryptocurrency are usually taxed like ordinary income
    • Capital gains on cryptocurrency that were held for more than one year are long-term gains and are ordinarily taxed at a lower capital gain rates

    The IRS is working hard to identify non-compliant cryptocurrency investors & businesses

    • The IRS cooperates with blockchain brokerages to identify investors/users of cryptocurrencies
    • Chain analysis, a blockchain advisor to the IRS, uses machine learning, open source references, and pattern recognition to identify suspicious activity among cryptocurrency transactions investors users and businesses
    • The IRS is looking for hidden taxable cryptocurrency business or investment income, and illicit transactions such as money laundering and drug sales
    • The IRS knows about “tumblers,” also called “mixers,” which mix funds to obscure them; Bitcoin mixers may complicate or delay IRS investigations but won’t prevent detection
    • New laws roll out in May that will target virtual currency exchanges like Coinbase; part of their purpose, though, is to identify individual users and prioritize cryptocurrency tax compliance
    • Users whose unreported Bitcoin transactions exceeded $20,000 are most likely to face audits or even criminal tax investigations and subsequent potential for tax evasion prosecution

    Cryptocurrency and 1031 exchanges

    • Bitcoin does not qualify for like-kind exchange under Section 1031
    • Section 1031 now only applies to real property

    If you are concerned about your history of tax noncompliance with cryptocurrency reporting requirements it is crucial for you to explore your alternatives with an IRS Bitcoin tax lawyer as soon as possible. Contact the Tax Law Office of David W. Klasing for a reduced rate initial consultation with an experienced cryptocurrency tax attorney.

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