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IRS Issues Reminder to Report Crypto Earnings

The US Internal Revenue Service (IRS) has published a document ahead of a 17 April deadline to report all income derived from virtual currency transactions, including from cryptocurrencies.

Referring to the IRS Notice 2014-21, which is a guidance on general tax principles, the revenue agency views all virtual and digital currency transactions as taxable, just as any other transactions on properties would. It also warned citizens against withholding such information, noting the privacy features of major cryptocurrencies such as Bitcoin:

“Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency… because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS.”

Taxpayers who fail to report related earnings can be subject to IRS audits and can be liable for penalties and interest. The reminder states that the tax agency could also resort to criminal prosecution “in more extreme situations”, targeting crimes such as tax evasion and falsification of tax returns. Convictions for tax evasion could result in harsh prison terms of up to five years and a fine of up to $250,000, while false returns could be subject to prison terms of up to three years and a fine of up to $250,000.

Under the same notice, this means that even salaries paid by employers in virtual currency must be filed by employers on the regular Form W-2 and subject to federal income tax withholding and payroll taxes. Freelancers and remote workers classified as independent contractors who get paid in virtual currency are not exempt, either, with self-employment tax rules applying.

However, under current laws, virtual currency is not treated as currency that could generate forex gains or losses and are, therefore, such gains or losses will not be subject to US federal tax.

IRS eyes trained firmly on cryptocurrency

The IRS has been increasingly active in pursuing tax revenue from US citizens involved with virtual currency, especially since 2016 when the combined market capitalization of cryptocurrencies hit USD 8 billion, before racing past USD 600 billion by the end of 2017, with Bitcoin leading the way to an all-time high approaching USD 20,000.

In November 2016, a US federal court ordered cryptocurrency exchanger Coinbase to hand over some 13,000 customer records to the IRS as part of a bid to recover missing revenue from tax evaders who bought Bitcoin from 2013 to 2015.

Despite bitter resistance on the part of Coinbase, they eventually caved in, issuing a statement on their blog last month notifying that Coinbase would hand over data to IRS as per the court summons. It claimed a “partial” victory, after fighting the summons in court “in an effort to protect its customers, and the industry as a whole, from unwarranted intrusions from the government.”.

The data requested includes taxpayer IDs, names, dates of birth, addresses, and transaction records from the period of 2013 to 2015.

 

 

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