Are You Confused with Virtual Currency? was published by JD Supra on 6/26/18.
The ins and outs of virtual currency (VC) continue to challenge those who received VC for services rendered, accepted it for goods sold, bought it for investment less than a year ago, bought it for investment more than a year ago or are mining it. Regardless of how the VC was obtained, VC continues to confuse Individuals, Government Agencies and Businesses.
In addition to the confusion surrounding VC, there is limited guidance how to treat and deal with VC. Who regulates VC? The IRS, Securities Exchange Commission (SEC), Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC)? The answer to this question is not clear. That said, we do know that there are regulatory developments brewing as VC continues to change and influence how goods and services are rendered and how we as a society, pay for them.
Those who hold or accept VC are concerned with the tax treatment of VC. IRS does not yet have a third-party reporting requirement for virtual currency. IRS treats VC like property for US tax purposes and all the principles that apply to property transactions also apply to virtual currency transactions. This is what we know this directly from IRS:
⦁ A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
⦁ Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue Form 1099-MISC.
⦁ Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
⦁ Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
⦁ The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
IRS was stern in its Issue Number IR-2018-71 that Taxpayers need to report their VC transactions on their income tax return and that VC transactions are taxable by law just like transactions in any other property. In addition, it is evident that IRS continues to see VC as a conduit for tax evasion: “Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest. In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000”. The IRS sentiment is that the pseudo-anonymous nature of VC transactions lends itself to a potential Taxpayer temptation to hide taxable income form the IRS.
Don’t be a victim of your own making
Taxpayers can be subjected to financial penalties for failure to comply with tax laws. If a Taxpayer “underpays” a tax responsibility due to VC transactions, the Taxpayer may be subjected to accuracy-related penalties under section 6662 of the Internal Revenue Code. In addition, if a Taxpayer who fails to timely or correctly report VC when required to do so, could be subjected to information reporting penalties under section 6721 and 6722 of the Internal Revenue Code. Taxpayers engaged in VC transactions ought to keep adequate books and records and consult their tax specialist in order to appropriately report VC transactions.