Have you hopped on the bitcoin bandwagon? If so, you should know that the IRS has issued guidelines for digital or virtual currency.
First, as with all property transactions, record-keeping is extremely important. Additionally, the IRS clearly states that virtual currency – like bitcoins – is treated as property for U.S. Federal tax purposes, and the general rules for property transactions apply. In other words, the IRS expects transactions to be reported. And not reporting carries big risks. If you want to avoid any legal problems involving the IRS then you should think about hiring STO attorneys for legal assistance.
Bіtсоіn is a vіrtuаl сurrеnсу that uѕеѕ сrурtоgrарhіс encryption ѕуѕtеm tо fасіlіtаtе ѕесurе transfers and storage, the only problem is that people don’t know how to buy bitcoin. Unlike a fіаt сurrеnсу, bіtсоіn іѕ not рrіntеd bу a сеntrаl bасk, nor іѕ it bасkеd bу аnу. Bitcoins аrе generated bу what is саllеd mіnіng—а рrосеѕѕ whеrеіn hіgh-роwеrеd соmрutеrѕ, оn a dіѕtrіbutеd nеtwоrk, use an ореn ѕоurсе mаthеmаtісаl fоrmulа tо produce bіtсоіnѕ. It tаkеѕ rеаl hіgh-tесh hаrdwаrе and hоurѕ оr even dауѕ to mіnе bіtсоіnѕ. Onе can either mіnе bіtсоіnѕ оr buу thеm frоm ѕоmеоnе bу рауіng cash, uѕіng a сrеdіt card, оr еvеn a PауPаl ассоunt. Bitcoins can be uѕеd lіkе a fiat wоrld currency to buу gооdѕ and ѕеrvісеѕ, those interested can find more details at xcoins.io.
Virtual Currency Is Taxable by Law
To guide taxpayers on the specific details about tax reporting their cryptocurrency activities, the IRS issued NOTICE 2014-21. Because virtual currency transactions share the same general tax principles as property transactions, you need to know that:
- A payment made with virtual currency is subject to the same tax reporting as any other payment made in property.
- Payments made to independent contractors and other service providers with virtual currency are taxable, and self-employment income tax rules generally apply. Normally, this means issuing a 1099-MISC.
- Wages paid to employees using virtual currency are taxable. The compensation is subject to federal income tax withholding and payroll taxes — and must be reported on a W-2 form.
- When you’re reporting employee earnings on the W-2 because you paid with virtual currency, you must convert the coin value to U.S. dollars as of the date each payment is made.
- Third parties that settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers must report payments to these merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
- Although cryptocurrency is subject to capital gains tax, the tax implications vary — largely based on how the property is treated “in the hands of the taxpayer.” You’ll need to consider short-term and long-term capital gains and losses — and whether you’re writing off gains against losses correctly.
- Income tax withholding and payroll taxes must be paid in U.S. dollars.
Not Reporting Is Risky
Neglecting the tax implications of virtual currency transactions could put you at risk for an audit and then lead to significant penalties and interest.
According to the journals written by Trading with Bitcoin Profit, in more extreme situations, taxpayers could be subject to criminal prosecution for not reporting properly. For example, anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. If you’re convicted of filing a false return, you could face a prison term of up to three years and a fine of up to $250,000.
The bottom line: The IRS treats cryptocurrency as property for tax purposes, so selling, spending and even exchanging it has implications related to capital gains. Similarly, cryptocurrency functions as ordinary income when used as compensation for employees or contractors, you can get more info by simply checking the ICO marketing agency list.
Stay on the Right Side of Mandatory Reporting
When it’s time to handle tax reporting for your business, you can print, mail and electronically file 1099, W-2 and ACA forms with efile4Biz.com. An IRS-authorized e-file provider, is an industry pioneer in online processing. With this resource, you can handle your annual tax reporting with total ease and confidence.