The IRS considers virtual currencies such as Bitcoin as property for tax purposes. If you receive Bitcoin as compensation, it would be considered taxable income by the IRS.
A failure to report virtual currency income could result in back taxes, penalties, interest, and IRS collection actions such as bank levies. Talk to a tax attorney if you have unreported Bitcoin income that you need to disclose to the IRS.
Virtual Currency Transactions
Taxpayers can’t avoid paying income taxes by receiving property instead of cash as compensation. If this was possible, people could simply barter their property and services to avoid income taxes.
If you receive a computer worth $1,000 as compensation for services, this would generally all be taxed as income. The same principle applies to virtual currency transactions.
For example, Pam pays Jim with $500 of Bitcoin for his services. Jim has $500 of taxable income from this transaction, and he must report this income on his tax return.
The value of the virtual currency can be determined using any public exchange that has rates based on market supply and demand. If you invest in Bitcoin or other virtual currencies and sell for a gain, this may be a long-term or short-term capital gain on your tax return.
Any way you use virtual currency, it will be taxed the same as other property would under federal tax laws.
Enforcement of Virtual Currency Tax Laws
The IRS is aware that some taxpayers have not reported their virtual currency transactions or income. Letters were sent to over 10,000 taxpayers in the summer of 2019 to inform them of their reporting and tax payment obligations due to these transactions.
If you have undisclosed Bitcoin income, you should be aware of the consequences and penalties you could face. You may have several options for resolving your tax problems, including installment agreements, seeking penalty relief, or settling your tax debt.
If you receive a letter from the IRS about unreported virtual currency transactions, don’t expect the problem to just go away. The IRS can assess tax on your Bitcoin income and then seek collection of the tax liability in various ways, including levies, wage garnishments, and federal tax liens.
Contact a tax attorney to discuss the consequences of unreported Bitcoin income and to seek resolution to your tax problems.
The Gartzman Law Firm can help you with unreported virtual currency income and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.