Do You Know the 2018 Tax Reporting Requirements with Cryptocurrency?

tax requirements crypto virtual currency

When it comes to digital or virtual currencies (such as bitcoin), the IRS expects transactions to be reported. Virtual currency is treated as property by the IRS, so it’s taxable by law. Although less scrupulous users of virtual currencies may try to fly under the radar and hide their activities, not reporting these transactions carries considerable risks.

To guide taxpayers on the specific details about tax reporting their cryptocurrency activities, the IRS issued NOTICE 2014-21. Because virtual currency transactions share the same general tax principles as property transactions, you need to know that:

  • A payment made with virtual currency is subject to the same tax reporting as any other payment made in property.
  • Payments made to independent contractors and other service providers with virtual currency are taxable, and self-employment income tax rules generally apply. Normally, this means issuing a 1099-MISC.
  • Wages paid to employees using virtual currency are taxable. The compensation is subject to federal income tax withholding and payroll taxes — and must be reported on a W-2 form.
  • When you’re reporting employee earnings on the W-2 because you paid with virtual currency, you must convert the coin value to U.S. dollars as of the date each payment is made.
  • Third parties that settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers must report payments to these merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
  • Although cryptocurrency is subject to capital gains tax, the tax implications vary — largely based on how the property is treated “in the hands of the taxpayer.” You’ll need to consider short-term and long-term capital gains and losses — and whether you’re writing off gains against losses correctly.

Don’t Cut Corners with Tax Reporting

Neglecting the tax implications of virtual currency transactions could put you at risk for an audit and then lead to significant penalties and interest.

In more extreme situations, taxpayers could be subject to criminal prosecution for not reporting properly. For example, anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. If you’re convicted of filing a false return, you could face a prison term of up to three years and a fine of up to $250,000.

The biggest takeaways: The IRS treats cryptocurrency as property for tax purposes, so selling, spending and even exchanging it has implications related to capital gains. Similarly, cryptocurrency functions as ordinary income when used as compensation for employees or contractors.

Stay on the right side of mandatory tax reporting with all your virtual currency activities. When it’s time to handle tax reporting for your business, you can print, mail and electronically file 1099, W-2 and ACA forms with is a leading, IRS-authorized e-file provider and an industry pioneer in online processing, and with this resource, you can handle your annual tax reporting with total ease and confidence.

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