Virtual Currency Update – What Your Clients Need to Know August 1, 2019

The IRS has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. By the end of August, 10,000 “educational letters” will be delivered to taxpayers telling them to amend their returns to report their virtual currency transactions. There are three versions of the letter, often called a soft notice — fix the problem or we’ll audit you — Letter 6173, Letter 6174 and Letter 6174-A.

virtual currency tax update cpa

Coinbase Inc. lost its bid in Federal court to stop the IRS from examining its customer records. With just 800 taxpayers reporting Bitcoin transactions from 2013 to 2015, when more than 14,000 Coinbase users bought, sold, sent, or received at least $20,000 of Bitcoin, the information that the IRS gathered produced plenty of audit targets, evidenced by the 10,000 letters.

How is Virtual Currency Taxed?

Notice 2014-21 provided answers to frequently asked questions relating to the taxation of virtual currencies. Also see IR-2018-71 where the IRS reminded taxpayers to report virtual currency transactions.

  • Sales. Virtual currency is treated as property for US tax purposes. The general tax principles that apply to property transactions also apply to virtual currency. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer.
    • Example. Steve bought 10 Bitcoins for $10,000 in 2010. He sold them in July 2019 for $94,000. He must report the sale on his schedule D as the sale of property. Steve has a long-term capital gain of $84,000.
    • Tax practitioner planning. A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. Thus, a Form 1099-K is required if the taxpayer has more than 200 transactions or the transactions total more than $20,000.
  • Miners.When a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. The fair market value of virtual currency received for services performed as an independent contractor, measured in US dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.

IRS Guidance is Coming. . . Soon

After requests from AICPA, Congress and other interested parties, the IRS announced in IR-2019-32 that it anticipates issuing additional legal guidance in this area very soon. There is agreement that guidance is needed on calculating cost basis, lot assignment and virtual currency hard forks.Click image to enlarge

virtual currency tax update cpa

Sharon Kreider, CPA, has helped more than 15,000 California tax preparers annually get ready for tax season. She also presents regularly for the AICPA, the California Society of Enrolled Agents, CCH Audio, and Western CPE. You’ll benefit from the detailed, hands-on tax knowledge Sharon will share with you—knowledge she gained through her extremely busy, high-income tax practice in Silicon Valley. With her dynamic presentation style, Sharon will demystify complex individual and business tax legislation. She’s a national lecturer for business and professional groups and consistently receives outstanding evaluations. In 2014, she was awarded the prestigious AICPA 2014 Sidney Kess Award for Excellence in Continuing Education.

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The new reporting requirements on brokers are addressed in Section 80603 of the bill. “Broker,” by definition in Sec. 6045 (c)(1), is expanded to include “any other person who (for a consideration) regularly acts as a middleman with respect to property or services…A person shall not be treated as a broker with respect to activities consisting of managing a farm on behalf of another person.” In turn, the bill defines a “digital asset” as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.