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Since its invention in 2009, Bitcoin has caught on as a mainstream worldwide digital currency. Many alternative types of cryptocurrency have followed in its wake. It is not at all that uncommon to see major merchants and corporations accept Bitcoin as a form of payment as does this law firm. As virtual currency has become more mainstream and popular, questions have arisen about how to classify these alternative forms of currency for tax purposes.At the Tax Law Offices of David W. Klasing, our Los Angeles Bitcoin and virtual currency tax attorneys and CPAs have years of experience navigating the new frontier of virtual currency tax law. We have helped numerous clients properly report their Bitcoin transactions on their tax returns to avoid potential fines and penalties. We have also assisted those who have failed to make such required reports in the past in bringing their IRS case to a positive resolution. Call us today at (800) 681-1295 to schedule a consultation.
What if I Received a Letter from the IRS About My Unreported Cryptocurrency Transactions?
This can very easily result in an eggshell audit or criminal tax investigation if not handled property. 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 huge rise in the market in 2017 followed by the collapse of the market in 2018 and beyond many investors are finding themselves with huge tax liabilities without the value in their remaining portfolio to cover the taxes owed. 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 in dealing with all facets of crypto including air drops. Keeping your cryptocurrency offshore creates tremendously more exposure. Lastly, we are very accustomed to investors that had crypto with a brokerage that folded or was shut down and the complications that causes.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-reported cryptocurrency transactions) 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.
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 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, Kovel CPAs 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!See our Non-Filer Q and A Library
See our 2011 OVDI Q and A Library
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Understanding Bitcoin
Bitcoin is a type of decentralized, virtual currency. 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 it’s 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.
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.
With the success of Bitcoin, many other types of virtual currencies that operate in a similar matter have come in its wake. With each of these types of virtual currency, there is artificial scarcity designed into the model. For example, there can never be more than 21 million bitcoins. Not all 21 million bitcoins have been discovered through the virtual “mining process,” but when they have been, more will not be created.
Bitcoin can be acquired and used in a variety of different ways. Because there are is a limited number of bitcoins, their price varies depending on current supply and demand, and they can be bought and sold like stocks. In addition, it is now much more common for retailers to accept Bitcoin as a form of valid payment. More and more corporations, like AT&T, Overstock.com, and Microsoft, have begun to accept Bitcoin as payment as it has become more mainstream over the last few years.
Understanding the Tax Ramifications of Buying and Selling Bitcoin in Los Angeles
Although using Bitcoin instead of real-world currencies can help you avoid certain banking fees, it will not help you avoid paying income or sales taxes. As virtual currencies have been on the rise, so too has the amount of attention the IRS has paid to transactions involving them. This led to the agency producing new guidelines on virtual currencies, which they define 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 does not have legal tender status in any jurisdiction.
The most important thing to note about Bitcoin and other cryptocurrencies for tax purposes is that the IRS treats them as property, rather than a form of currency. This means that tax laws which apply to property, such as the capital gains tax, apply to Bitcoin and that any bitcoin you acquire (unless it is received as payment for services rendered) must be reported on Schedule D. As such, while acquiring of Bitcoin is not a taxable event, you still must keep a record of the amount the bitcoin was worth on the open market when you purchased it. This is because when you eventually sell the bitcoin, you will subtract the market value of the bitcoin on the day you bought it from the selling price, and this is the amount that the IRS will tax.
How much tax is assessed on each bitcoin will depend on how long you owned it before selling. For bitcoins that you held for less than a year, the short-term capital gains tax will apply at a rate equivalent to your income tax. If you held the bitcoin for more than a year, however, it will be subject to the long-term capital gains tax, at a rate of 0-20 percent depending on your income bracket when you sell. If it is sold for a loss, you may qualify for a reimbursement by the IRS.
Intense record-keeping is necessary to keep track of all the information on gains and losses you will be required to report to the IRS for your taxes to be assessed. It can be helpful to have a tax professional like the Los Angeles Bitcoin and virtual currency attorneys at the Tax Law Offices of David W. Klasing assist you in ensuring your records are complete and up to date and that your Bitcoin transactions are properly reported. Failure to report this property on your return as required can result in serious civil and even criminal penalties. If you are facing trouble from the IRS about a past failure to report Bitcoin earnings, contact an experienced tax lawyer like those at our office right away so we can work to mitigate any potential damage.
If You Have Tax Questions About Virtual Currencies, Call Our Los Angeles Tax Lawyers Today
Because the IRS classifies Bitcoin as a form of property, the tax rules for reporting it differ from those for other forms of currency. Extensive record keeping is required to keep track of your capital gains. At the Tax Law Offices of David W. Klasing, we can help you properly report bitcoin transactions on your returns and work to get you into compliance for any past mistakes without facing the most serious penalties. To schedule a consultation, call us today at (800) 681-1295.See our Bitcoin and Cryptocurrency Q and A Library
More Questions and Answers About Bitcoin
- What to Do When IRS Wants My Bitcoin Trade History
- Bitcoin Tax Record Keeping
- Can I Appeal a Bitcoin Tax Determination by the IRS?
- Why does BitCoin and other types of Virtual Currency draw so much attention from the Taxing Authorities and the Federal Government?
- Where is the most current IRS guidance on Virtual Currency found?
- Should You Report Bitcoin on Your Taxes?
- What Is Bitcoin?
- How does the IRS treat Bitcoin?
- Can I Face Tax Penalties for Mistakes Made with Bitcoin?
- How Does a Business Determine Its Taxes When Paid in Bitcoin?
- Who Pays the Taxes in a Bitcoin “Mining Pool?”
- Are Bitcoin Miners Required to Pay Self-Employment Tax?
- Can Bitcoin Trading Create an Obligation to Pay Capital Gains Taxes?
- What Is Bitcoin Digital Currency and Why Does it Matter for Tax Purposes?
- What Happens if the IRS Thinks I’m Using Bitcoin to Commit Tax Evasion?
Regardless of your business needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
In addition to our main office in Irvine, the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad and Sacramento. During the COVID-19 pandemic, our staff are working from home, but have full virtual meeting capability.
Our office technology allows clients to meet virtually via GoToMeeting. With end-to-end encryption, strong passwords, and top-rated reliability, no one is messing with your meeting. To schedule a reduced-rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client.
