By now everyone who trades, uses, and mines virtual currency (aka cryptocurrency) is aware that U.S. tax laws and regulations have lagged behind recent developments. A tax attorney at Gold Path Tax can help make sure you comply with all applicable tax rules so that you're not in for a nasty surprise in the future. If you and/or your small business use Bitcoin, Litecoin, Ethereum, Ripple, or any other non-fiat currency, you need to follow the applicable tax rules or face potential civil and even criminal penalties when you are eventually discovered. It's better to come clean now with help from an experienced tax attorney than to keep rolling the dice year after year, hoping you don't get audited or that an exchange doesn't release your records to the IRS.
The most important thing to know (and if you're serious about crypto you probably already know this) is that, at the federal level, the Internal Revenue Service (IRS) considers the sale or other exchange of virtual currencies―including using crypto to pay for services and for physical goods―as a taxable event, just as if you had sold a stock or bond. You must pay either short-term or long-term capital gains taxes (depending on how long you've held the crypto) at its "fair-market value" in U.S. dollars. That's right: even holding cryptocurrency as a long-term investment, because you believe in it, rather than just playing the short-term speculation game, will eventually have tax consequences when you finally sell off (or exchange) the crypto. Every cryptocurrency sale or exchange must be reported to the IRS on Form 8949, which is the same form used for reporting the sale or other disposition of any other kind of capital asset, like securities. Obviously if you are a small business that accepts Bitcoin from customers, you should remind them that when they pay you in virtual currency, they should also record the current fair-market value of the coin in U.S. dollars, so that they can file it on their Form 8949.
However, note that merely buying cryptocurrency with U.S. dollars is not a taxable event. You only need to report it when you sell, trade, or use your virtual currency. Similarly, a wallet-to-wallet transfer (even between exchanges) is not a taxable event, even if some exchanges will preemptively consider these taxable events to cover themselves legally. (If an exchange records a non-taxable wallet-to-wallet transfer as a taxable event, make sure to correct them.) Giving someone crypto as a gift is also not taxable to you (unless you exceed the gift tax exemption amount, in which case you would owe gift tax), although the person receiving your gift inherits its cost basis (i.e., they must eventually report the capital gain/loss to the IRS on Form 8949 when they sell or exchange the crypto you gave them, based on the different between the price you paid for the crypto in U.S. dollars and they sell/exchange it for in U.S. dollars).
If you've been into crypto for a few years and haven't reported your past capital gains from sales or exchanges of Bitcoin or other virtual currencies, Gold Path Tax can help you rectify your past mistakes. Contact us today for a free initial consultation with an experienced tax attorney. We can be reached at 248-246-1154 or firstname.lastname@example.org.