With Bitcoin and altcoins like Ethereum, Litecoin, and the dozens of other blockchain coins gaining huge popularity over the past few years, the IRS is watching cryptocurrency harvesters, traders, and investors very closely. More and more people are running into problems with reporting their holdings or mining, following securities rules for trading these investments, and reporting income based in coins.
If you or a loved one is involved in any of these activities, it is important to understand the IRS’ tax rules and how they affect your cryptocurrency holdings. The Roseville and Sacramento tax lawyers at the NewPoint Group help Californians with tax planning and preparation, reporting international holdings, and IRS audit defense, as well as other tax needs. For a free consultation on your case, call our law offices today at 1-800-358-0305.
Digital Currency is Taxed as Property in California
Since cryptocurrency is not “cash,” it is taxed as a property holding. It shares many tax rules with securities and other financial holdings, but it is primarily a piece of property. That means that coins are subject to “capital gains taxes.” While holding your coins, you may not realize the increase in their value as profit. The minute you sell these coins, you receive taxable gains.
Capital gains are often a tricky piece of taxation, and there are many tax strategies to reduce the burden of tax you pay on capital gains. Capital gains also often face lower tax rates than income. This is similar to how stocks are taxed, and may mean lower tax rates that profits from business or work income.
Securities Rules for Bitcoin in CA
Many of the government regulations growing around cryptocurrencies treat them much like securities, e.g. stocks. Like an IPO (initial public offering) for stock, ICOs (initial coin offerings) must be thoroughly vetted, announced ahead of time, and reported to the government. The Securities and Exchange Commission (SEC) oversees many of these issues. Failing to follow the rules for ICOs can result in the government suing you or filing criminal charges against you.
It is the SEC’s position that, while cryptocurrencies are a new landscape for investing and financial trading, the rules remain the same. As such, most of the SEC’s concern at the moment is that people invest safely. Since there are fewer safeguards and guarantees that trading and investing works as it should, it is much easier to lose your investment. Regardless, selling or trading cryptocurrency may require a license or permission, so talk to an attorney before off-loading your coin investments or opening coin-based investments.
Reporting Blockchain Currency Holdings
If you have any financial accounts or holdings in another country, you need to report these holdings to the government. The IRS and other agencies need to know about these holdings, and usually require two different types of reporting.
First, is the “FBAR,” or Report of Foreign Bank and Financial Accounts. These are required any time you have a “financial interest in or signature authority over a foreign financial account.” Bitcoin may not fall squarely into a “foreign account,” but you should still talk to an attorney about where your cryptocurrency is “stored,” and whether the IRS may consider it a foreign investment.
Second is a “FATCA” report, under the Foreign Account Tax Compliance Act. This requires foreign banks and institutions to report their US account holders to the government. This may be necessary in some cases.
Foreign and US laws are still catching up with the concept of blockchain currency, and may classify things differently. It is important to seek the guidance of an attorney who understands these rules to make sure you stay on the right side of the law.
Paying Income Tax on Bitcoin
The IRS defines income as coming from any source. If you are given Bitcoin or an altcoin as payment for services rendered or items sold, that is clearly “income” under the IRS definition. If these coins are truly the currency of the future, we may see them continue to grow in popularity for day-to-day transactions like payment.
Whether you are paid in cash, coins, or services, you still need to report your income to the IRS. Our Roseville tax attorneys can help you understand the complexities of reporting and accounting for your Bitcoin payments on your tax returns. Especially if you are self-employed or work as a contractor, it may be a complicated process to file estimated tax withholdings and report your income to the IRS.
California Tax Lawyers for Cryptocurrency Investors
If you or a loved one trades, farms, invests in, or gets paid in Bitcoin, Litecoin, Ethereum, Zcash, Dash, Ripple, or another blockchain currency, talk to an attorney about your tax consequences. It is always better to file paperwork you may not need and fully report holdings than it is to later fight a legal battle with the IRS or the SEC. For a free consultation on your case, contact the NewPoint Group today at 1-800-358-0305.
“NewPoint Law Group has the expertise and experience to navigate the tax code and assist taxpayers in limiting their tax liability.”Stephan M. Brown, Esquire