In today’s age, the buying and selling of cryptocurrency, and even the use of cryptocurrency in everyday commerce, has become increasingly common. Unlike with traditional currency, sales and transfers of Bitcoin happen between two people directly, rather than through a bank or other centralized institution. This allows for more private transactions, and it also allows those involved to avoid having to pay transfer and banking fees associated with traditional institutions. The tax consequences of buying and selling cryptocurrency can be complex, especially when held in a foreign account or exchange. Though we go through the basics in this article, anytime you have cryptocurrency in foreign accounts or exchanges, you should reach out to a skilled, experienced virtual currency tax lawyer and CPA like those at the Tax Law Offices of David W. Klasing. We can advise you on exactly what needs to be reported to avoid facing trouble down the line.
The IRS classifies virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” but that is not recognized as a form of legal tender in any nation of the world. As such, it is classified as property rather than currency, and property tax principles are used to determine how to report virtual currency on your returns and what taxes you are assessed. Specifically, virtual currencies are subject to the capital gains tax. Therefore, while the purchase of a Bitcoin or other virtual currency is not a taxable event, selling it or using it to buy something else is. The taxable amount will be the amount for which it is sold minus the fair market value of a bitcoin on the day you purchased it.
As such, extensive records must be kept regarding the fair market trading value of each bitcoin you acquire on the day you acquire it so that you properly and completely fill out Schedule D on your tax return. You will also need to pay attention to the amount of time you have held the bitcoin before selling it. If you only had it for less than a year before selling it, you will be assessed a short-term tax on your capital gains equal in rate to your income tax. However, if you hold it for a year or more, you will be subject to a long-term capital gains tax at a rate up to 20 percent, depending on your income bracket.
Capital losses must also be reported if you lose money in buying and selling cryptocurrency. You can write off capital losses to offset the tax on capital gains but cannot receive reimbursements of more than $3000 from capital losses in any given tax year. An experienced virtual currency tax attorney and CPA like those at the Tax Law Offices of David W. Klasing can help you get back into compliance where large taxable amounts of Cryptocurrency gains have gone unreported to avoid facing potential criminal and civil penalties.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including substantial amounts of non-reported cryptocurrency income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore 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 being 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, KovelCPAs and EAs, 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!
Each year, any American taxpayer who has more than $10,000 worth of cash or other assets, such as cryptocurrency, in any offshore or foreign bank accounts at any point during the tax year must make a report of all money and assets held in any foreign bank or financial accounts during that year. The form you fill out is called an FBAR. In addition, if you have an aggregate of $50,000 or more in foreign assets at the end of the tax year or have $75,000 or more in foreign assets at any point during the year, you must file another form called Form 8938 under the Foreign Account Tax Compliance Act (FATCA).
While the IRS has never issued guidance clearly stating that cryptocurrency held in foreign accounts or exchanges must be reported on FBAR or under FACTA the same way regular currency must be, they have also never issued guidance stating that such crypto-assets do not need to be reported. As such, to be on the safe side, we will usually advise clients to report it so that they do not face any trouble down the line. However, each situation is different, and you should not decide whether or not to report without first consulting with an experienced dual tax attorney and CPA like those at the Tax Law Offices of David W. Klasing, who can do a deep-dive into the specifics of your case and give you the most accurate advice.
The rules regarding whether cryptocurrency held in foreign exchange accounts must be reported on FBAR or FACTA are incredibly unclear. For this reason, anytime you are dealing with such a situation, you should reach out to a skilled virtual currency tax attorney and CPA like those at the Tax Law Offices of David W. Klasing for the most accurate and up to date advice. We will do everything in our power to make sure that you are paying as little as possible in taxes while also meeting all the legal reporting requirements. To set up a consultation, call us today at (800) 681-1295.
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