Taxpayers are directed by the IRS on how to properly report virtual currency exchanges through services such as Bitcoin.
Our world is in constant flux thanks to the innovative changes brought into our daily lives from technology. The possibilities for implementing technology are seemingly endless, reaching into almost every facet of life. One area that has been greatly affected in recent years is that of person to person (P2P) payments. Gone are the days of cash or check only. Individuals can now process payments virtually through a myriad of services and applications at just the touch of a button on a mobile device. As a result, the rules and regulations surrounding “virtual currency” have changed to keep up with the innovative technology and applications put into use each year.
The International Revenue Service (IRS) has issued information for taxpayers on the way they should treat virtual currency such as Bitcoin when filing income and property in their taxes. According to the IRS, convertible virtual currency is to be treated as a capital asset rather than cash. The reason for this is because convertible virtual currency is treated like “real” currency for most intents and purposes, but it does not have actual legal tender status in any jurisdiction. Consequently, it is not to be treated as legal tender or currency.
What does this mean for taxpayers?
This is an important distinction because it means that Bitcoin funds and other virtual currency will be subject to capital gains rules in regards to any gains or losses within a tax year. Capital losses up to $3,000 per year can then be deducted against income.
In general, the IRS is stating that virtual currency is to be treated more like stocks than like cash. This is easier compute for individuals who buy and sell Bitcoin as an investment and hold the currency for long periods of time. It can be trickier to compute gains and losses for those who use Bitcoin for small every day purchases over small amounts of time. For computing these gains and losses, you may want to consult your tax attorney or certified accountant.
Additionally, individuals who received payment for goods or services through Bitcoin are also required to file the payment as income. For example, an independent contractor who received Bitcoin payments for their work is required to report the fair market value of that exchange as income which is then subject to federal income tax withholding.
If you have traded in virtual currency in the past year and have questions regarding the tax reporting requirements for it, consult a professional tax lawyer. A tax attorney can assist you in properly reporting gains, losses, income, and expenses related to virtual currency.
About Freeman Tax Law
Freeman Tax Law (FTL) is a boutique law firm consisting of a multi-disciplinary team of tax professionals including tax attorneys, CPAs and a professional staff that have vast experience with foreign tax compliance and regulatory matters for financial institutions. FTL consults with both FFIs and USFIs with regard to Foreign Account Tax Compliance Act (FATCA) and related regulatory matters and assists them developing procedures on how to comply with these laws. FTL provides a multidisciplinary approach for filing offshore voluntary disclosures. Working to help clients prevent future tax headaches we offer a complete wealth management and estate planning team. As an experienced firm with wide reach, Freeman Tax Law provides immediate assistance to our clients planning for and resolving all tax related challenges.
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