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If you need tax help in Oxnard, the Tax Law Office of David W. Klasing is here to offer unparalleled expertise on a breadth of state, federal, and international issues. We can represent you before various tax agencies, protect your rights from being violated, identify strategies to limit your tax liabilities, and help you make more effective financial decisions. For a reduced rate consultation, contact us online, or call our Oxnard tax office at (805) 617-4566 today.
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Since the invention of Bitcoin in 2009, many investors and businesspeople have started looking at crypto-currencies as valuable investments and methods of payment. Those who are considering purchasing, investing in, or trading cryptocurrency often have questions about the unknowns, including how trading in virtual currency will affect their tax bill.
At the Tax Law Offices of David W. Klasing, our virtual currency attorneys have extensive experience helping our clients navigate the difficult tax-related issues that come with buying and selling a cryptocurrency. As a dually licensed Tax Attorneys and CPAs, we can help you with record-keeping and advise you on your tax obligations. If the IRS opens an audit or criminal tax investigation against you, we can help you navigate it to the best potential resolution. To schedule a confidential consultation, call us today at (800) 681-1295.
If you have never reported your cryptocurrency and have extensive unreported gains, we can help you to get back into tax compliance without the risk of criminal tax prosecution through a domestic or offshore voluntary disclosure.
What is Bitcoin?
Bitcoin is a form of decentralized, virtual currency. It can be traded and transferred directly from person-to-person, so transactions involving Bitcoin do not need to go through a centralized bank or financial institution. This allows for transactions to be kept private and for users to avoid having to pay bank and transfer fees.
An actual “bitcoin” is just a computer code. It essentially exists as a secure computer file powered by an open-source code known as blockchain. Each transaction involving the bitcoin functions as a “block” in the “chain” of the code. Transactions involving the blockchain are verified by the use of high-powered computers. The blockchain serves as a public ledger of each transaction involving an individual bitcoin, but without using anyone’s personal identity.
Bitcoin was designed with an artificial scarcity in the model wherein no more than 21 million bitcoin will ever exist. Bitcoin are discovered through a complex, computer-based process called mining, and currently over 15 million bitcoin have been mined. When all 21 million have been mined, no more will be produced. The value of each bitcoin, then, depends on the availability of Bitcoin in the market at that moment. Much like stocks, the value of a bitcoin will rise and fall according to principles of supply and demand.
Following in the wake of Bitcoin’s successes, a multitude of other forms of digital currency have been created. More of them are being valued by one of the exchanges, and it has become common for people to buy and sell different varieties of digital currency like stocks. In addition, companies are slowly beginning to accept Bitcoin as a form of payment. Some employers are even paying their workers or offering bonuses in Bitcoin.
The Tax Consequences of Buying and Selling Virtual Currency
Although dealing in virtual currency can help you save on transaction and banking fees, it will not get you out of dealing with the IRS. The IRS is keenly aware of the trade in virtual currencies and have issued guidelines over the years on how they are to be reported for tax purposes. They define virtual currency as a “digital representation of value” that is not recognized as legal tender by any nation of the world. For tax purposes, this means that bitcoin is classified as a property, not a currency, and that principles of property tax law apply.
Bitcoin and other virtual currencies, as property, are subject to the capital gains tax. You must report all capital gains and losses involving virtual currency on Schedule D of your tax return. In order to do this, you must keep track of the fair market value of a bitcoin in U.S. dollars on the day you bought it. While the purchase of the bitcoin is not a taxable event, whenever you sell the bitcoin or use it to purchase something, a taxable event occurs. In order to calculate the capital gains, you will need to subtract the fair market value of the bitcoin at the time of purchase from the selling price.
The rate at which the capital gains will be taxed depends on how long you have held the bitcoin for. If you possessed it for less than a year before selling it, you will be assessed a short-term capital gains tax at a rate equal to your ordinary graduated income tax rate. If you held the bitcoin for a year or more, a long-term capital gains tax will be applied depending on your income bracket.
You are required to report both capital gains and losses on your return. Detailed book and record keeping is therefore required. You can write off losses to offset taxes on gains, but you cannot receive more than $3,000 a year of offset against your ordinary income where capital losses exceed your capital gains in a given tax year. An experienced virtual currency attorney like those at the Tax Law Offices of David W. Klasing can help guide you through this often-confusing process and be sure that you are in compliance.
What If I Am Paid in Bitcoin?
Although it is still uncommon, some employers have been paying their employees or independent contractors in Bitcoin. If you are paid in Bitcoin, this is reported as income, rather than property. You must keep track of the fair market value bitcoin to dollars conversion rates on the dates of any payments. For independent contractors, you may also be required to assess self-employment taxes. A skilled tax law attorney can help you work through these more complex issues.
If You Have Questions About Paying Taxes on Virtual Currency, Call Our Oxnard Attorneys Today
Laws and regulations related to Bitcoin and other types of virtual currency require those who invest in it to keep detailed records transaction records. At the Tax Law Offices of David W. Klasing, we offer the perspective of both a Tax Lawyer and a CPA. We can help you organize and reconstruct records and advise you on how to report virtual currency on your taxes and deal with the IRS. If you are placed under investigation by the IRS for failure to properly report earnings on virtual currency, we know how to fight to mitigate the damage and bring the case to a positive resolution. To schedule a consultation, call us today at (800) 681-1295.
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
