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What are the tax rules pertaining to virtual currency?

Posted on December 17, 2019

Virtual currency is not going away anytime soon. Not surprisingly, Bitcoin and other virtual currencies have been on the IRS tax radar since 2014, beginning by categorizing virtual currencies as property.

Since virtual currency is categorized as property, if someone were to use Bitcoin to buy something, they would need to report the sale and its resulting gain or loss on their tax return, according to IRS Notice 2014-21.

This year, the IRS ramped up the way it searches for unreported virtual currency transactions. Here is what the CPAs at Teipen Selanders Poynter & Ayres have found:

  • In July 2019, the IRS sent out more than 10,000 warning letters to taxpayers who failed to report their virtual currency transactions. Apparently, this list came from a summons of Coinbased data on customers who bought, sold, transferred or exchanged more than $20,000 of virtual currency in 2013, 2014 and 2015. Those who failed to amend their tax returns following this warning should receive audit letters beginning early next year.
  • This past September the IRS issued a revision explaining the technicalities of taxing virtual currency “hardforks” and “air drops.” Although indefinable to most of us, taxpayers who regularly deal in virtual currencies will recognize these classifications and appreciate that the IRS understands them as well.
  • In October of 2019, new wording in a surprise second draft of the Form 1040, Schedule 1, added the following question: AT ANY TIME DURING 2019, DID YOU RECEIVE, SEND, SELL, EXCHANGE OR OTHERWISE ACQUIRE A FINANCIAL INTEREST IN ANY VIRTUAL CURRENCY?

As seasoned CPAs, TPSA fully appreciates that the IRS has put taxpayers and tax practitioners on notice that we’re fully responsible for recognizing and policing virtual currency transactions.

Heads up: As tax season approaches, the CPA team at Teipen will be taking this new information regarding virtual currency seriously. We will be asking all our clients a virtual currency question prior to our standard review checklist.

As always, we want to keep all our clients aware of — and in compliance with — IRS guidelines.