San Francisco Bitcoin and Virtual Currency Tax Attorney & CPA
Bitcoin has become one of the most popular investment opportunities over the past couple of years. The stories of people returning massive profits from their early investments in cryptocurrencies are plentiful. However, the IRS has heard these stories as well and are determined to regulate this new industry.
Believe it or not, Bitcoin and other virtual currencies are taxable. In fact, they are taxable in more than one way. No matter how you come into your virtual currency, the government will impose a tax on it. Failing to recognize the tax liability associated with your Bitcoin can leave you facing an audit or, worse, criminal charges for tax evasion. However, there are some steps that you can take to make sure that you stay compliant with the tax code.
The first step that you can take is reaching out to the Tax Law Offices of David W. Klasing. Our dual-licensed San Francisco Tax Attorneys and CPAs have the requisite knowledge to protect our clients against new tax law developments that target Bitcoin investors. To speak to us about our services and what we could do for you, call us at (800) 681-1295.
Declaring Bitcoin as a Capital Asset on Tax Returns in San Francisco
The IRS has issued clear guidance that the government considers Bitcoin and other cryptocurrencies as property rather than traditional currency. This is critical in tax law, as property has the ability to appreciate or depreciate over time. Further, property can be held as an investment, which makes it subject to capital gains taxes.
Capital gains taxes apply to transactions involving capital assets. A capital asset is something that is owned for investment purposes, such as a stock, bond, or even a baseball card collection. When you sell a capital asset, your tax liability will be determined by the difference between the asset’s value at the time of acquisition and its value at the time of sale. If you made money on the sale of the asset, that profit is called a capital gain and is subject to capital gains tax. If you lost money, you can declare a capital loss on your tax return.
Therefore, keeping track of your Bitcoin purchase and sale records is critical for accurately filing tax returns. Since the value of Bitcoin and other virtual currencies fluctuates so rapidly, you must be precise with the values and gains or losses that you assess. This is made all the more important due to the federal government’s ability to collect information on user transactions from trading platforms such as Coinbase.
Paying Taxes on Bitcoin Transactions in San Francisco
As mentioned above, you must pay capital gains taxes on cryptocurrency investments. However, alternative uses for Bitcoin and other cryptos have proliferated in the United States as virtual currency popularity rises. You may be paid in Bitcoin as an employee or independent contractor. You may even buy or sell products or services using Bitcoin as payment. In all of these scenarios, the transaction itself will create tax liability.
If an employer pays an employee with Bitcoin or another cryptocurrency, that payment will be subject to both income tax for the employee and employment tax for the employer. Employers must report the fair market value of cryptocurrency wages paid to employees on Form W-2. Even if the business relationship is one of buyer and independent contractor, virtual currency as payment would constitute self-employment income and is therefore taxable.
To calculate income for the purposes of tax reporting, the cryptocurrency that you receive should be calculated as the fair market value at the time that you received it.
The only way that cryptocurrency will be free of tax liability upon receipt is where it is transferred as a bona fide gift. However, you will still have to recognize income once you sell or exchange the gifted crypto asset.
Reporting for Bitcoin and Virtual Currencies on Tax Returns in San Francisco
Generally, most transactions involving capital assets must be reported on Form 8949 (Sales and Other Dispositions of Capital Assets). Additionally, you should summarize all gains and deductible losses on capital asset transactions on Form 1040, Schedule D (Capital Gains and Losses). Ordinary income from virtual currency should be reported on Form 1040, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1 (Additional Income and Adjustments to Income), depending on the circumstances.
Form 1040, Schedule 1 contains the following question: “At any time during ____ (year), did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” If you answer yes, you will have to report your crypto transactions in the return. If you answer no, you are signaling to the IRS that you have nothing to hide in this area. However, if the IRS feels differently (or already knows differently), you will face audits, stiff penalties, and additional taxes. Further, the IRS might view the erroneous “no” answer to the question as a willful act of tax evasion, which might leave you facing criminal charges that can carry jail time.
If you do not buy or sell any Bitcoin in that year, you most likely will not have to declare it without some other realization event. However, the situation becomes more complicated if your holdings are centered offshore, which may subject you to FBAR reporting guidelines. If you have foreign Bitcoin holdings, speak to one of the San Francisco dual-certified tax attorneys and CPAs at the Tax Law Offices of David W. Klasing.
Need Help Understanding Bitcoin Taxes in San Francisco? We Are Here for You.
Reporting Bitcoin for tax purposes is a messy business with potentially devastating consequences for mistakes. Call the Tax Law Offices of David W. Klasing at (800) 681-1295 to ensure that your San Francisco crypto earnings never cause you these problems.