Cryptocurrencies are making a big splash in today’s economy. The most popular cryptocurrency is the Bitcoin. The price has skyrocketed in 2017 from $1,000 to over $5,000 U.S. dollars. This is because the Bitcoin is becoming more prevalent in use and many companies are beginning to recognize and accept it as a payment system.
Most people don’t realize that whenever Bitcoin is bought, sold or traded there are tax implications similar to a stock transaction. According to the Internal Revenue Service (IRS), Bitcoin is a capital asset and that means you’ll have a capital gain or loss when disposing of the virtual currency. Spending virtual currency is really two transactions in one: disposing of the virtual currency and spending the dollar-equivalent amount. In other words, income is taxable, even if you paid in virtual currency!
Bitcoin is known for being anonymous; however, the beauty of block chain technology is that it is public and fully decentralized. This means anyone can download a copy and observe all of the transactions. The potential tax windfall for the IRS is huge, and the agency is now aggressively taking steps to track and crack down on Bitcoin tax cheaters. In an effort to collect on this windfall, the IRS has contracted with a company called Chainalysis that offers software for analyzing and tracking Bitcoin transactions.
The software was designed to help the IRS track the use of Bitcoins for trade and to uncover its use for concealing wealth from the tax authorities. It does this by identifying the owners of digital “wallets” that users employ to store their Bitcoins. All that is required is verification of an identity to a single transaction. Currently, Chainalysis claims to have information on 25% of all Bitcoin addresses.
If you transact in Bitcoin, be sure to let your accountant know so that they can accurately report it on your tax return. Also, it is very important to keep detailed records of the transactions to ensure that income is measured correctly. No documentation means no basis as far as the IRS is concerned, so track it like you would stock or real estate. If you fail to report your gains, the IRS could slap you with a 20% negligence penalty or as much as a 40% penalty if your income is understated by 10% or more.