Since the introduction of Bitcoin in 2009, the use of virtual currency has become more and more common across the globe. Now, it is typical for investors to use a virtual currency broker such as Coinbase to buy, sell, and exchange Bitcoin and other forms of digital currency. The IRS has taken note of the extensive use of this site by those involved in the buying and selling of digital currency and, in some cases, has used the court system to force Coinbase to turn over user information in order to assist IRS and Department of Justice investigations into whether individuals are properly paying taxes on virtual currency gains. This information can then be used against you during a potential audit or criminal tax investigation that could lead to civil or criminal penalties.
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Generally, virtual currency is taxed as property. As such, it is subject to the capital gains tax. Although purchasing virtual currency is not a taxable event, selling it or using it to purchase something is. This means that you must keep careful records of the fair market value of an individual unit of this virtual currency in U.S. dollars on the day you purchase it. This can be found on exchange sites like Coinbase.
In order to calculate the capital gains that you need to report on your return, you will subtract the fair market value of the currency on the day you purchased it from the amount for which you sold the currency or the value of the item or service obtained in exchange for it. If you held the virtual currency for less than a year before selling or using it, you will be assessed a short-term capital gains tax equal to your income tax rate. If you held the virtual currency for a year or more before selling, you will be assessed a long-term capital gains tax of up to 23.8%, depending upon your income bracket.
In the early days of virtual currency, it was difficult for the IRS to track the buying and selling of these commodities, but now the agency has become quite adept at doing so. One of the main ways they obtain information about virtual currency trading is by obtaining court orders requiring online brokerage sites like Coinbase to turn over user information. For example, in 2016, a district court ruled that Coinbase was required to turn over their customer account information to the government.
When the IRS receives customer information from Coinbase or other virtual currency exchange sites, they can then check this against the customers’ tax returns to ensure that they are properly reporting their capital gains and losses about virtual currency. If the information reflected in your Coinbase account does not match up with the information reported on your return, it is likely that the IRS will open an audit. When deciding whether to assess civil penalties or refer the matter for a criminal investigation, the auditor will likely focus on whether your lack of reporting was willful or a genuine oversight.
Whether your conduct was willful or not, as soon as you learn than an audit is occurring you should contact an experienced tax attorney like those at the Tax Law Offices of David W. Klasing if you have not already done so. In some severe cases, failure to report virtual currency information on your return can lead to fines of up to $250,000 as well as time in prison. We can work to bring you into compliance without subjecting you to the potentially severe civil and criminal charges that you could face for willful failure to make these reports.
The best way to avoid being audited and the potentially devastating consequences that can follow is to retain an experienced virtual currency tax professional like those at the Tax Law Offices of David W. Klasing before you file your returns. Making proper reports of your capital gains on virtual currency requires extensive and painstakingly detailed record-keeping of the value of the currency on the dates it was bought and sold. Our Tax Attorneys & CPAs can help you organize and document this information so that it will be easy to report when the time comes. Our tax attorneys can advise you on exactly what, when, and how you are required to report.
If you end up facing an audit due to past failures to report this information, our tax attorneys will be there with you every step of the way working to mitigate the damage and protect your rights during meetings and correspondence with the auditor. We will show that any failure to report was not willful and to bring you into compliance without subjecting you to the most serious penalties. To set up a consultation, call our firm today at (800) 681-1295.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed returns coupled with affirmative evasion of payment) 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.
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!
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