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Las Vegas, often celebrated as the world’s entertainment capital, is renowned for its dynamic economic landscape, vibrant nightlife, and penchant for innovation. Its diverse population and numerous businesses mean financial dealings here are as multifaceted as the city. Within this bustling desert metropolis, one of the emerging areas of interest is the realm of virtual currencies.
From 2009 to the present, Bitcoin and other virtual currencies have transformed from emerging technological innovations to significant financial instruments. As their mainstream adoption has surged, many investors, particularly in thriving economic centers like Las Vegas, have started to engage with these digital assets in ways similar to their approaches to stocks and bonds. However, as the interest in virtual currency intensifies, so does the associated uncertainty and concerns. It would be wise for Las Vegas residents to understand the federal tax obligations tied to transactions and investments in this emerging asset class.
At the Tax Law Offices of David W. Klasing, our team of premier Bitcoin and virtual currency dual-licensed tax attorneys and CPAs are deeply entrenched in the ever-evolving landscape of virtual currency federal tax laws. Over the years, we’ve been the beacon for numerous clients, guiding them through the intricacies of record-keeping and reporting procedures required to file a federal tax return, including earnings from virtual currency. Regrettably, many people who hold virtual currencies either unintentionally or deliberately ignore their federal tax and reporting requirements and consequently can face severe civil and criminal tax penalties. Beyond advisory capacities, we’ve staunchly defended our clients against IRS underreporting allegations and brought their cases to successful civil conclusions.
If the complexities of virtual currency and its federal tax ramifications are on your radar, our Las Vegas expertise is at your service. We are happy to provide a reduced rate initial consultation, which you can arrange by calling our offices at (800) 681-1295 or by clicking here to schedule online.
Understanding Bitcoin and Virtual Currencies
In 2009, an enigmatic figure (or group) named “Satoshi Nakamoto” introduced Bitcoin, heralding a significant transformation in our financial world. Unlike the traditional forms of currency, which governments and financial institutions regulate, Bitcoin can be transferred directly from user to user through the web. It’s a decentralized virtual currency that the U.S. Treasury acknowledges, noting its ability to bypass conventional banking routes and allow users to choose their associations, interactions, and exchanges directly and without restraint.
How Does Bitcoin Function?
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.
What Role Do “Miners” Play?
For the Bitcoin network to operate seamlessly, individuals contribute substantial computing power in a process known as “mining.” Rather than the conventional sense of the term, “mining” in the context of Bitcoin entails individuals offering computational resources to validate and authenticate transactions on the blockchain. As a token of appreciation for ensuring the network’s reliability and security, these contributors are awarded newly minted bitcoins.
Is There a Limit to Bitcoins?
Bitcoin’s framework is uniquely designed with an element of scarcity, drawing parallels to conventional currencies backed by tangible assets like gold. Unlike modern fiat currencies, which aren’t bound by inherent supply limits, Bitcoin is expressly engineered to have a maximum of around 21 million units. As of September 2023, over 19 million bitcoins have been mined and introduced into the system. As the total mined amount inches closer to the 21 million threshold, market forces of supply and demand are likely to influence the value of each Bitcoin, akin to fluctuations observed in stock or commodity markets.
Are There Other Currencies Like Bitcoin?
Following Bitcoin’s trailblazing success, numerous other virtual currencies have emerged, many of which also utilize blockchain technology. Examples include Ethereum, Ripple (XRP), and Litecoin, to name a few. Termed “cryptocurrencies,” each alternative has unique features and benefits. Much like Bitcoin, their values are determined by supply, demand, and overall market sentiment. Today, there are specialized trading platforms akin to stock exchanges dedicated to these cryptocurrencies. Their acceptance is rapidly growing; not only are they seen as investment opportunities, but they’re also becoming more mainstream as actual currencies. A growing number of businesses are starting to accept them for products and services, and there’s an emerging trend of employers contemplating cryptocurrency-based salaries.
Federal Tax Implications of Bitcoin and Other Cryptocurrencies
The IRS characterizes virtual currency as a “digital representation of value” without legal tender status in any country. Instead of viewing it as currency, like the U.S. dollar, the IRS categorizes it as property. This is akin to how stocks or real estate are treated for federal tax purposes. As the utilization of virtual currencies like Bitcoin has intensified over the years, the IRS has escalated its enforcement efforts, mainly focusing on lapses in reporting these transactions on federal tax returns:
- Buying and Selling: Acquiring Bitcoin with fiat can be devoid of federal tax implications. However, potential federal tax liabilities arise when you sell or deploy Bitcoin for purchases. This differentiation is fundamental for taxpayers to avoid inadvertent tax non-compliance;
- Tax Calculation: Ascertaining the taxable amount requires taxpayers to subtract Bitcoin’s fair market value (in U.S. dollars) on the acquisition day from the amount it fetched when sold or used. Furthermore, swapping one cryptocurrency form for another also results in capital gains or losses, necessitating a similar calculation process;
- Schedule D Reporting: All capital gains and losses stemming from virtual currency transactions must generally be meticulously reported on Schedule D of your annual federal tax return;
- Duration of Holding: The length of time you retain Bitcoin determines the federal tax category:
- Short-term: Bitcoin disposed of within a year of acquisition falls under short-term capital gains tax, harmonizing with the graduated income tax rates linked to your reported adjusted gross income;
- Long-term: Potential long-term capital gains federal tax liabilities emerge for Bitcoin held beyond a year, with rates reaching up to 20%. A supplementary 3.8% net investment tax could also be contingent on your income bracket.
- Capital Losses: While offsetting capital gains tax with capital losses is feasible, limitations exist. Taxpayers can only counterbalance up to $3,000 of net capital losses against their annual income. Although these losses don’t enjoy a carryback privilege, they can be carried to future tax years;
- Document Everything: Given the complexities involved, comprehensive record-keeping becomes paramount. This encompasses tracking the fair market value of each Bitcoin at acquisition and throughout any successive trades.
Earning Through Cryptocurrency
Although it is still relatively uncommon, some individuals are paying employees and independent contractors in Bitcoin or other forms of Cryptocurrency:
- Receiving payment or mining in Cryptocurrency necessitates reporting as ordinary income on federal tax returns, subject to self-employment tax, distinguishing it from capital gains associated with merely purchasing and selling Cryptocurrency;
- Employers paying employees in Cryptocurrency must calculate and withhold standard payroll taxes and
- Independent contractors paid in Cryptocurrency might be subject to self-employment taxes on these earnings.
What if I Received a Letter from the IRS About My Unreported Cryptocurrency Transactions?
If not appropriately handled, this can quickly result in an eggshell audit or a federal criminal tax investigation. Many cryptocurrency traders are shocked to learn that their exchanges of one type of crypto for another were taxable in the year of the exchange. With the massive rise in the market in 2017, followed by the collapse in 2018 and beyond many investors are finding themselves with substantial federal tax liabilities without the value in their remaining portfolio to cover the taxes owed. Many traders are shocked to learn that the IRS may have obtained their information from a John Doe summons of Coinbase or another cryptocurrency brokerage. We have extensive experience dealing with all facets of crypto, including air drops. Keeping your Cryptocurrency offshore creates tremendously more exposure. Lastly, we are well-versed in assisting investors who held crypto with brokerages that have either ceased operations or were shut down, and we understand the intricacies of such situations.
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!
How Can Las Vegas Residents Access David W. Klasing’s Services?
David’s renowned expertise is now accessible in Las Vegas at our appointment-only satellite office, merging legal and 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 in person. This tailored service has been crafted with our clients in mind, ensuring no supplementary travel expenses are added to your invoice. Contact us at (800) 681-1295 or click here to schedule a reduced rate initial consultation online.
