Understanding the Evolving Landscape of Cryptocurrency Taxation
13 videos • 75 views • by Los Angeles Tax Attorney California Cryptocurrency Tax Attorney and CPA In the last decade, cryptocurrency has gone from a little-known or understood commodity to a common investment and a source of payment used by some of the world’s biggest corporations. As more people buy and sell these virtual currencies and use them for everyday purchases, some fail to understand the significant tax ramifications, including detailed reporting requirements, that can come with investing in or merely utilizing crypto. This can be a major mistake, as the IRS has been more attentive to failures to file proper tax returns related to virtual currencies in recent years. The penalties for failing to report or pay taxes on exchanges of cryptocurrency accurately can be quite steep and can even lead to criminal tax liability if perceived to be willful. At the Tax Law Offices of David W. Klasing, many of our tax professionals are both licensed tax attorneys and certified public accountants. We provide the best of both worlds in terms of helping you keep records and properly file tax returns related to virtual currency, as well as defending you against any civil or criminal issues that arise. If you have multiple years of substantial non-reported taxable cryptocurrency transactions, it is in your best interest to reach out to the government rather than wait around for them to reach out to you. Understanding the Evolving Landscape of Cryptocurrency Taxation Cryptocurrencies represent a unique form of digital value. They can function as mediums of exchange, units of account, or stores of value, similar to traditional currencies in some respects. However, unlike government-issued currencies, they don’t hold legal tender status globally. The concept of ‘convertible’ virtual currencies is particularly significant, as these types of cryptocurrencies can be exchanged for real-world currencies, thereby intertwining with traditional financial systems. The dynamic nature of cryptocurrency values, exemplified by the fluctuating prices of prominent cryptocurrencies like Bitcoin, underscores the importance of accurate and timely reporting in compliance with tax regulations. Understanding and adapting to these value fluctuations is crucial for accurate tax reporting. The closing price for Bitcoin (BTC) as of December 2023 is $42,261.09. Tax implications for virtual currency transactions are significant. For instance, mining activities, where individuals successfully extract cryptocurrencies, result in taxable income equivalent to the fair market value of the mined currency at the time of receipt. In broader terms, cryptocurrencies that can be converted into traditional currencies are considered property for federal tax purposes, necessitating adherence to the general tax principles applicable to property transactions. Cryptocurrencies are primarily underpinned by blockchain technology, a form of distributed ledger technology. This technology involves multiple digital systems recording and synchronizing transaction details across a network of nodes, ensuring transaction security and transparency. Understanding blockchain’s role is fundamental to comprehending the operational mechanics of cryptocurrencies. Revised Stance on Legal Tender Status: The Notice amends the previous assertion in Notice 2014-21 that virtual currency does not have legal tender status in any jurisdiction. This revision reflects a more nuanced view of virtual currencies in light of their growing acceptance and recognition in some foreign jurisdictions. These updates signal an evolving understanding and regulatory approach to virtual currencies, recognizing their complex role in the global financial landscape. For taxpayers and practitioners in the field of cryptocurrency, these changes emphasize the importance of staying informed about the latest regulatory developments. Non-Compliance with Cryptocurrency Reporting Large Amounts of Unreported Income As of 2023, the Internal Revenue Service (IRS) has significantly intensified its efforts to ensure compliance in cryptocurrency reporting, focusing especially on large amounts of unreported income. This enhanced focus can be attributed to the increasing mainstream acceptance and usage of digital assets, which necessitates more robust regulatory oversight to ensure tax compliance. Enhanced IRS Measures and Digital Asset Reporting The IRS continues to emphasize the necessity for taxpayers to report all digital asset-related income. This includes a broad range of activities, such as trading cryptocurrencies, regardless of whether these transactions result in a gain. The responsibility for calculating and reporting these gains falls on the individual users, as currently, the platforms on which these digital assets are traded do not provide this information directly to the IRS.