IRS Guidance on Tax Treatment for Virtual Currency

Virtual currency is still currency in the eyes of the law. Why shouldn’t it be? You spend real money to buy it, and you can use it just like real money to buy things. You can also sell it for cold, hard cash.

Yet the IRS has had to constantly remind people that they still owe taxes on the gains they make from the buying and selling of virtual currency. The IRS has clarified these rules, but some people just don’t seem to be getting the message. Others just aren’t sure what their obligations are in certain circumstances. Now, the IRS is issuing more updates to make the tax responsibilities clear.

New Guidelines

This month, the IRS issued two new guidelines on virtual currency that expanded previous guidance from 2014.

Revenue Ruling 2019-24 addresses common questions that taxpayers and practitioners have about tax obligations for virtual currency. The guidance concerns so-called “hard forks,” which occur when a cryptocurrency is spun off to create another. A taxpayer may buy a cryptocurrency and then end up with a hard fork.

Some questions covered by the new guidance include whether a taxpayer is considered to have earned gross income from a hard fork even if new units of cryptocurrency are not issued (the answer is no) or whether a taxpayer is considered to have earned gross income if they receive an air drop of new currency after a hard fork (the answer is yes). But, since there is no case law or regulations on this issue, is the IRS overreaching?

In addition to the Revenue Ruling, the IRS also issued Frequently Asked Questions regarding virtual currency transactions.

“The IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” said IRS Commissioner Chuck Rettig in a press release. “The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”

Previous Efforts

The latest guidelines replace the previous guidelines that the IRS issued in 2014, under Notice 2014-21. That notice identified virtual currency as property subject to taxation, and it relied on general principles of tax law to reach its conclusions. The notice uses a series of Frequently Asked Questions to provide guidance on common virtual currency transactions.

Agency officials say they are continuing to seek public feedback to create additional guidance where it is still needed.

The IRS is continuing to struggle with taxpayers not paying taxes on virtual currency or improperly reporting the income from these transactions. That is resulting in a loss of revenue for the agency, as well as penalties for taxpayers – often as a result of misunderstanding of the law. The agency has been working actively to combat this problem, such as through these recent guidelines and through an educational mailing earlier this summer to taxpayers who may not have properly reported taxes on virtual currency.

Legal Assistance

Ignorance of the law is not a defense of the law. Not only can failure to pay the proper taxes on virtual currency transactions result in serious fines and penalties, but it can also lead to criminal prosecution, depending on the circumstances. The stakes are too high to leave your tax reporting to chance.

You need to work with an experienced tax professional around Arizona to file your taxes each year. Make sure you choose someone who is committed to staying up-to-date on complex and changing tax law. Virtual currency is the cutting edge of the market, and you can’t look to someone rooted in traditional methodologies to handle your taxes.

If you think you may have underreported your taxes on virtual currency transactions, contact Silver Law PLC. Our tax attorneys can audit past returns to ensure that you are in compliance with the law while also getting the maximum deductions and credits available to you. We may be able to help you meet your obligations without actually paying more money. We can also represent you if your case has resulted in criminal charges. Our tax lawyers represent clients in a range of matter, including civil and criminal litigation, innocent spouse relief, tax audits, foreign tax reporting, and more. Contact us today to speak with a tax lawyer about your case.

Silver Law PLC

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Scottsdale, AZ 85254
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Las Vegas, Nevada 89145
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