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Panorama City Bitcoin and Virtual Currency Tax Lawyers
The Los Angeles Tax Attorneys, CPAs and EAs at The Tax Law Offices of David W. Klasing may be able to help if you are facing potential tax trouble in Panorama City or anywhere in Los Angeles. Our Tax Lawyers have decades of experience handing audit defense, advising clients on business or personal taxation, and fighting the IRS on behalf of taxpayers. For a reduced-rate consultation on your case, contact our tax law firm at 800-681-1295 or schedule online today. Our Panorama City Tax Law Office is located on Roscoe Boulevard in downtown Panorama City. Easily accessible from Van Nuys, North Hills, North Ridge, North Hollywood, Burbank, and other Los Angeles neighborhoods in the San Fernando Valley.
Over the past decade, as the use of Bitcoin and other virtual currencies has increased, questions have emerged about the financial and legal ramifications of these types of investments. Consequently, one of the most pressing questions people have had is regarding the tax consequences of investing in virtual currency.
At the Tax Law Offices of David W. Klasing, our Panorama City dual licensed Tax Attorneys and CPAs have years of experience helping our clients who invest in digital currency deal with the related tax consequences. We can guide you through the necessary record-keeping and reporting measures to keep you in compliance with the IRS. If you have failed to report and pay taxes on past Bitcoin transactions, we can work to mitigate any potential penalties. To schedule a confidential consultation, call us today at (800) 681-1295.
What is Bitcoin?
At its essence, Bitcoin is a decentralized form of virtual currency. It was invented in 2009 by an anonymous individual or individuals called Satoshi Nakamato. Unlike with traditional forms of currency, Bitcoin can be transferred directly from user to user through the web. No bank or central institution needs to be used as an intermediary. This provides for a greater amount of privacy and can save you money on banking and transaction fees.
The actual “bitcoin” is really just a computer code. It is held in the form of a computer file and transferred into and out of the virtual wallets on users’ computers or cell phones. In order to keep the transactions secure, they are powered by an open-source code known as a blockchain. With blockchain technology, each transaction represents a new “block” that is “chained” to the original code of the bitcoin. Thus, a permanent, public ledger is created—but without using people’s names or personal identifying information.
Designed into the model of Bitcoin is an artificial scarcity. Unlike real-world currencies where more and more money can always be printed, there will never be more than 21 billion bitcoins in the world. Bitcoins are obtained by a complex process called mining, and currently over 15 million have been mined. Depending on how many of these are up for sale at a given time, however, the value of an individual bitcoin will fluctuate. Value is tied largely to supply and demand like with stocks and bonds.
Following the success of Bitcoin, other virtual currencies have appeared on the market. These virtual currencies use similar blockchain technology and are also valued based on exchange classifications of current supply and demand. Different types of virtual currency can be traded for one another on these exchanges. In addition, more companies are accepting Bitcoin as payment for goods or services, and some employers are even paying employees or giving them bonuses in Bitcoin.
How Do I Report Buying and Selling Bitcoin on My Taxes?
As Bitcoin has become a more mainstream investment, the IRS has begun to pay closer and closer attention to those who make investments in virtual currency without properly reporting them on their returns. The IRS defines virtual currency as a digital representation of value that is not recognized as a form of legal tender in any nation of the world. For tax purposes, it is classified as property, akin to real estate or stocks, rather than currency.
This means that those buying and selling bitcoins will be assessed a capital gains tax and will be required to make detailed reporting of their gains and losses on Schedule D of their tax return. While the purchase of Bitcoin is not a taxable event, any time it is sold or used to purchase goods is. To calculate the taxable amount, you will need to subtract the fair market value of the bitcoin in U.S. dollars on the day you bought it from the price at which it was sold.
The onus is on you to keep track of information related to fair market value of each bitcoin on the date you purchased it and as to each subsequent trade. This requires extensive bookkeeping and retention of records related to each purchase, sale, or exchange. After the information has been reported on your return, the IRS will assess a tax based on the amount of time you have held the bitcoin. If you held it for less than a year before selling it, it will be taxed under the short-term capital gains tax at a rate equal to your graduated income tax rate. If you held it for a year or longer, the long-terms capital gains tax will apply to the gains at a rate up to 23.8 percent, depending on your adjusted gross income. Note that you must report any capital losses in addition to capital gains. Capital losses involving Bitcoin can be written off to help offset capital gains taxes. However, you cannot offset ordinary income by greater than $3,000 in a calendar year for capital losses. Capital losses cannot be carried back to offset capital gains. Excess capital losses can be carried forward to subsequent tax years.
It is also important to note that different rules apply if you are paid by your employer in Bitcoin, or earn crypto in exchange for mining activity, rather than purchasing it on your own. This will be taxed as ordinary income subject to self-employment taxes. Wages paid in crypto are subject to all the typical withholdings that employers must take. Before filling out returns that involve virtual currency, it is important that you contact an experienced dual licensed virtual currency Tax Attorney and CPA like those at the Tax Law Offices of David W. Klasing who can advise you and guide you through what can be a complex process.
If You Have Tax Questions About Virtual Currency, Call Our Panorama City Attorneys Today
Tax issues related to virtual currency can be complex. At the Tax Law Offices of David W. Klasing, our tax professionals have years of experience helping our clients properly classify their earnings on virtual currency for tax purposes and avoid fines and penalties. We have also helped those under audit or IRS criminal investigation for past failure to report or pay taxes on virtual currency bring their cases to a successful resolution. Call us today at (800) 681-1295 to schedule a consultation.
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?
