Awards & Recognition

San Jose, known for its vibrant tech industry and innovative spirit, is at the forefront of Silicon Valley’s economic landscape. The city’s dynamic mix of startups, established tech giants, and a diverse populace makes San Jose a hub for technological advancement and economic diversity. Within this thriving environment, the burgeoning sector of virtual currencies is increasingly capturing attention and interest.

In the rapidly evolving world of virtual currencies like Bitcoin and other digital assets, many investors and traders are navigating complex Federal and California state tax implications. Receiving a letter from the IRS about unreported cryptocurrency transactions discovered via John Doe Summons can, and should be, extremely alarming if you have a history of not reporting taxable crypto transactions. If not addressed appropriately, it may lead to a cryptocurrency-based, high-risk eggshell audit or even a covert criminal tax investigation. The surprise is often considerable when individuals learn that exchanges of one type of crypto for another are taxable events in the year they occur, even with no fiat currency changing hands, or that the IRS might have obtained their transaction details from sources like Coinbase. The volatile nature of the crypto market, with its turbulent highs and lows, can leave you facing substantial tax liabilities, often disproportionate to their current portfolio value.

At the Tax Law Offices of David W. Klasing, our San Jose Bitcoin and Virtual Currency Tax Attorneys and CPAs offer the combined expertise of Tax Lawyers and CPAs, specializing in the tax ramifications and reporting of virtual currency transactions. Whether it’s organizing and reconstructing transaction records where necessary, advising on reporting virtual currency on tax returns (significantly where the returns are being amended or are delinquent and therefore the audit risk is heightened) or navigating cryptocurrency-based high-risk eggshell audits and criminal tax investigations, our team is equipped to handle all aspects of cryptocurrency taxation. We aim to ensure compliance with the ever-changing tax regulations and mitigate tax reporting risks associated with cryptocurrency transactions for taxpayers and investors in San Jose. Call 408-643-0573 or 888-310-3543 or contact us online today to schedule a reduced rate initial consultation at our San Jose tax law offices or one of our other convenient locations across Northern California.

Can the IRS Track Bitcoin and Other Cryptocurrencies in San Jose?

A significant proposal from the Financial Crimes Enforcement Network (FinCEN) on December 18th, 2020, has made it easier for the government to track cryptocurrency transactions. This regulation affects cryptocurrencies in private wallets and trading platforms such as Coinbase. For instance, sending a large sum of cryptocurrency to a private wallet now requires the owner to inform the government about their wallet ownership.

Disclosure Requirements for Crypto Platforms

Under the new regulation, cryptocurrency platforms must disclose certain transactions to the government. For example, any user trading $10,000 or more daily must be reported. This increased scrutiny aims to curb financial crimes and other illegal activities potentially facilitated by virtual currencies.

Impact on Anonymity and Compliance

One primary appeal of using cryptocurrencies like Bitcoin is their anonymity. However, the U.S. government is concerned about their potential misuse for money laundering, human trafficking, and other crimes. By collecting the identities of individuals involved in crypto transactions, the government hopes to mitigate these risks. These regulations also increase the paperwork for taxpayers and companies engaged in cryptocurrency transactions. Non-compliance with the new reporting requirements can result in severe penalties from the Treasury Department, including daily penalties for financial institutions and fines or, at worst, criminal tax prosecution for individual taxpayers.

Currently, not every cryptocurrency exchange is tracked, but it is likely only a matter of time before more regulations impact the anonymity of crypto trading. To ensure compliance with these new changes, engaging with a dual-licensed San Jose Tax Attorney and CPA would be wise. Suppose you have multiple years of unreported cryptocurrency that, in total, would create a situation where $30,000 or more of federal taxes went unreported. In that case, you should consider making a voluntary disclosure, as $30,000 of tax loss under the federal sentencing guidelines is equivalent to one year in jail.

Note:  As long as a taxpayer that has willfully committed tax crimes (potentially including multiple years of unreported cryptocurrency income coupled with affirmative evasion of U.S. income tax on domestic or offshore crypto income) 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.

How Has Bitcoin’s Recent Surge Impacted San Jose Investors?

In March 2024, Bitcoin’s value reached unprecedented heights, surpassing $73,000. Several vital factors fueled this surge:

• Approval of Spot Bitcoin ETFs: The SEC’s approval of these ETFs in January led to a surge in demand, with daily trading volumes quickly hitting nearly $2 billion. An approximately $2.3 billion influx into these ETFs within a week highlighted Bitcoin’s growing acceptance as a mainstream investment.
• Bitcoin Halving Event: The upcoming halving event reduces the mining reward by half and is expected to tighten supply and drive higher prices. Historically, such events have led to significant price increases due to the decreased rate of new Bitcoins entering the market.
• Economic and Political Factors: The anticipation of interest rate cuts following Federal Reserve meetings and speculative activities surrounding the U.S. presidential elections have inclined investors toward riskier assets like Bitcoin. These uncertainties enhance the appeal of decentralized assets as a hedge against traditional market volatilities.

Tax Implications for San Jose Bitcoin Investors

Given these developments, the tax implications for Bitcoin investors in San Jose have become more pronounced. With Bitcoin classified as property by the IRS, capital gains or losses from Bitcoin transactions must be reported on federal tax returns. This includes:

• Sales and Exchanges: Every sale or exchange of Bitcoin, including trades between different cryptocurrencies, potentially results in taxable events.
• Capital Gains: The distinction between short-term and long-term capital gains, based on the holding period of Bitcoin, adds complexity to tax calculations and reporting.
• Meticulous Record-Keeping: Investors must keep thorough records of transaction values and dates to report to the IRS accurately.

At the Tax Law Offices of David W. Klasing, our dual-licensed San Jose Virtual Currency Tax Attorneys and CPAs offer the unique perspective of being both licensed attorneys and certified public accountants. Our CPA training helps 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 need mentioned above 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 gives us the skills needed to be sure nothing we do exposes you to civil fines or criminal tax liability.

How to Report Cryptocurrency on Taxes in San Jose: A Step-by-Step Guide

The IRS treats cryptocurrencies as property, similar to stocks. Any cryptocurrency exchange, sale, or purchase is recognized as a capital gain or loss. Additionally, if you receive cryptocurrency as a payment in your business, it is considered ordinary income and taxed accordingly. Mining cryptocurrencies is also a taxable event subject to ordinary income tax and self-employment taxes.

Steps to Report Cryptocurrency on Your Tax Return

1. Calculate Your Cost Basis and Proceeds:
   • Cost Basis: This is the value of the cryptocurrency when acquired.
   • Proceeds: The amount earned from the cryptocurrency’s sale or fair market value when exchanged.

Example: If you bought Bitcoin for $40,000 and sold it for $42,000, your capital gain is $2,000. Gains held for less than a year are short-term; those held for longer than a year are long-term.

1. Distinguish Between Ordinary Income and Capital Gains:
   • Ordinary Income: If you receive cryptocurrency for services rendered or products sold, it is treated as ordinary income taxed at your graduated income tax rate and subject to self-employment tax.
   • Capital Gains: Any subsequent exchange or disposal of the received cryptocurrency is reported as capital gains or losses.

1. Use Form 8949 for Capital Gains and Losses:
   • Every cryptocurrency sale generating capital gains or losses should be reported on Form 8949.
   • Information Needed:
     • Short-term and long-term crypto transactions
     • Dates when you acquired and sold/traded the cryptocurrency
     • Proceeds or gross USD profit from sales or trades
     • Total value of transactions
     • Capital gains or losses from trades

1. Submit Form 8949 with Form 1040 Schedule D:
   • Attach Form 8949 to your tax return with Form 1040 Schedule D, summarizing the total capital gains and losses.

Note: Only a Tax Lawyer can discuss your compliance issues, which could be potentially viewed by a taxing authority as caused by tax fraud, under the attorney-client privilege. Only a Criminal Tax Defense can accurately assess the risk of criminal tax prosecution inherent in cryptocurrency noncompliance scenarios and advise whether a quiet or loud voluntary disclosure is warranted. Contact our dual-licensed San Jose Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing for help as soon as possible. To schedule a confidential reduced-rate consultation, please contact us online or call (408) 643-0573 or (888) 310-3543 to schedule your reduced-rate initial consultation today. 

Need Help Understanding Bitcoin Taxes in San Jose? Contact Us Today

If you have received Letter 6173, 6174, or 6174-A from the IRS regarding your cryptocurrency account(s), try not to panic. Receiving a letter from the IRS does not necessarily mean that you will be criminally investigated for Bitcoin tax evasion. Still, it does mean that the IRS is aware of your financial activities, which could trouble taxpayers who have incorrectly reported virtual currency transactions.

If you have any questions about how to report and pay taxes on Bitcoin transactions, no matter how seemingly minor or trivial, we urge you to contact our California tax lawyers for an in-depth consultation. Only by reviewing your situation in detail can we determine which approach or strategy will likely yield the best results. To set up your reduced-rate Bitcoin tax consultation, call 408-643-0573 or 888-640-3408 or contact us online today to schedule a reduced-rate initial consultation at our San Jose tax law offices or one of our other convenient locations across Northern California.

Our San Jose office is conveniently located at:

2033 Gateway Pl Fl 5 

San Jose, CA 95110

408-643-0573