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Miami, widely acclaimed as a hub of culture, finance, and international trade, is distinguished by its dynamic economic landscape, vibrant cultural scene, and innovative spirit. Its diverse population and myriad businesses mean financial dealings in this coastal metropolis are as complex and varied as the city itself. Within this pulsating urban setting, one of the burgeoning areas of focus is the realm of virtual currencies.

Over the last 15 years, cryptocurrency has gone from a little-known or understood commodity to a common investment and a source of payment used by some of the world’s biggest corporations. As more people buy and sell these virtual currencies and use them for everyday purchases, some fail to understand the significant federal tax ramifications, including detailed reporting requirements, that can come with investing in or merely utilizing crypto. This can be a major mistake, as the IRS has been more attentive to failures to file proper tax returns related to virtual currencies in recent years.

As of 2024, the Internal Revenue Service (IRS) has significantly intensified its efforts to ensure compliance in cryptocurrency reporting, focusing especially on large amounts of unreported income. This enhanced focus can be attributed to the increasing mainstream acceptance and usage of digital assets, which necessitates more robust regulatory oversight to ensure tax compliance.

The penalties for failing to report or pay taxes on exchanges of cryptocurrency accurately can be quite steep and can even lead to criminal tax liability if perceived to be willful. At the Tax Law Offices of David W. Klasing in Miami, 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 Miami expertise is at your service. We are happy to provide a reduced rate initial consultation, which you can arrange by calling our offices at 1-(786)-949-5917 or by clicking here to schedule online.

Understanding Bitcoin and Other Virtual Currencies

Bitcoin is a type of decentralized virtual currency that the U.S. Treasury acknowledges. Its value goes up and down according to supply and demand, so that when more individual bitcoins are up for sale, the less they are worth. There are several different exchanges that value Bitcoin, and its worth can also vary depending on which one of these exchanges you use. The appeal of Bitcoin, as opposed to regular currency, is that it can be sent between users without passing through a central authority like a bank or federal regulating institution. This means that exchanges are more private and that you are not required to pay banking and transaction fees, potentially saving money.

What is a Bitcoin and How Does it Work?

An actual, individual bitcoin is essentially a code contained in a computer file that you can store in a digital wallet on your phone or computer. Transactions involving bitcoins are powered by an open-source code commonly known as a blockchain. The blockchain is a virtual, public ledger of all the transactions that have taken place involving this bitcoin. The “blocks” are the transactions that are “chained” to the code. Each transaction is confirmed by the use of high-speed computers that create a permanent record of it. This makes fraud extremely difficult.

How is Bitcoin Different from Traditional Currencies?

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 March 2024, 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. In March 2024, the Bitcoin landscape saw a remarkable surge, soaring to an all-time high of over $73,000.

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 Cryptocurrencies in Miami

In Miami, as in the rest of the U.S., the IRS views virtual currency not as conventional currency but as a “digital representation of value” that operates outside of legal tender status in any jurisdiction. Instead of viewing it as currency, like the U.S. dollar, the IRS categorizes it as property, akin to stocks or real estate, rather than traditional currency, such as the U.S. dollar. As the adoption and transaction volume of cryptocurrencies have surged, the IRS has intensified its focus on ensuring these digital asset transactions are properly reported on federal tax returns:

Transaction Taxation

Purchasing Bitcoin with traditional currency might not trigger immediate tax consequences. However, selling Bitcoin or using it for purchases can lead to federal tax obligations. This differentiation is fundamental for taxpayers to avoid inadvertent tax non-compliance;

Taxable Events and Calculation

The taxable event occurs when the fair market value of Bitcoin (in U.S. dollars) at the time of its sale, use, or exchange exceeds its value at acquisition. This calculation also applies when exchanging one type of cryptocurrency for another, creating a scenario for potential capital gains or losses;

Reporting on Schedule D

The IRS requires that all capital gains and losses from cryptocurrency transactions be reported on Schedule D of the federal tax return, a necessity for detailed and accurate tax filings;

Holding Period Implications

The tax impact depends on how long the Bitcoin was held before being sold or used:

Short-term

Bitcoin disposed of within a year of acquisition is subject to short-term capital gains tax, which aligns with the individual’s income tax bracket.

Long-term

Holding Bitcoin for more than a year may result in long-term capital gains tax, with rates up to 20%, plus a possible additional 3.8% net investment tax, depending on the taxpayer’s income level.

Capital Loss Limitations

Taxpayers can offset capital gains with losses but are capped at $3,000 against other types of income per year. While these losses cannot be carried back to previous tax years, they can be carried forward.

Importance of Documentation:

Meticulous record-keeping is essential, including tracking each Bitcoin’s fair market value at the time of purchase and during any subsequent transactions.

 

In 2023, the Department of the Treasury and the IRS proposed comprehensive regulations to enhance reporting requirements for digital asset transactions. These regulations extend the scope of information reporting under § 1.6045–1 to various entities involved in the digital asset space. They encompass brokers acting as agents, principals, or digital asset middlemen who facilitate sales or exchanges of digital assets for cash, broker services, or other property. The regulations specifically include digital asset trading platforms, payment processors, certain hosted wallet providers, and entities involved in the issuance and redemption of digital assets.

In addition to clarifying the broker definition under section 6045 of the Internal Revenue Code, these regulations propose that real estate transactions using digital assets be reported, detailing both the sellers of real estate and the fair market value of digital assets exchanged. Moreover, the transaction involving the exchange of digital assets for goods or services (excluding other digital assets) will be reportable under section 6050W, with the disposition of digital assets falling under the purview of proposed § 1.6045–1. These changes, aimed at providing clarity and enhancing compliance, have been met with mixed reactions from the cryptocurrency industry, reflecting concerns about potential complexities and challenges in implementing these new rules. For taxpayers in Miami navigating the complexities of cryptocurrency and federal taxes, understanding these guidelines is vital for ensuring compliance and minimizing potential tax liabilities.

How Can the Tax Law Offices of David W Klasing Help?

Receiving a letter from the IRS concerning unreported cryptocurrency transactions can be a significant cause for concern. If not appropriately handled, this can quickly result in a high-risk 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.  Many trades 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 airdrops. Keeping your cryptocurrency offshore creates tremendous exposure, too. 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!

David’s proven proficiency is now available in Miami at our appointment-only satellite office, providing both legal and federal tax services in one place—at a single hourly billing rate. We have just introduced a flexible scheduling option where our clients can reserve a four-hour slot at any of our satellite locations. David W. Klasing will travel to any of our satellite offices to meet with you, which would need to proceed by a one-hour reduced rate initial phone or encrypted go-to-meeting reduced rate initial consultation to warrant travel to the Gold Coast from California to ensure we are a good fit for your current needs. We have designed this service to benefit our clients, with no additional travel expenses added to your bill. Call us at 1-(786)-949-5917 or complete our online contact form today.

Our Miami, Florida Office is Conveniently Located at:

80 S.W. 8th Street, Suite 2000,
Miami, FL 33130