Cryptocurrencies are a type of digital asset that can be bought, sold, and exchanged for goods and services. They get their name from the encryption technology used to secure transactional data.
Although cryptocurrencies aren't considered "real currencies" in the sense of a U.S. dollar, almost any transaction conducted with them is subject to tax reporting. If a person engages in cryptocurrency exchanges throughout the year but fails to report gains or losses on their tax return, they may be exposed to an IRS audit and/or criminal investigation.
Let's explore cryptocurrency transactions and potential tax evasion charges further.
Does Cryptocurrency Have to Be Reported on Taxes?
As mentioned above, if a person makes any transaction with cryptocurrency – whether they buy it, sell it, or trade it for something of value – they must report the exchanges on their taxes.
Failure to report is considered tax evasion. A conviction for this offense can result in severe criminal penalties, which we'll discuss in more detail later.
How Is Cryptocurrency Taxed?
According to the IRS, cryptocurrency is treated as property. Thus, it is taxed similarly to how houses, stocks, bonds, and other investment instruments are taxed.
Taxable events concerning cryptocurrency include:
- Using it to buy goods
- Receiving it as payment
- Trading or selling it
Now, if someone purchased cryptocurrency but made no other transactions with it, they are not required to report the purchase on their taxes. Likewise, receiving cryptocurrency as a gift is not a taxable transaction. However, if the cryptocurrency is converted to cash or used to make other purchases, the capital gains and losses are taxable.
What Are the Consequences for Failing to Report Cryptocurrency Transactions?
Since 2014, the IRS has posted guidelines on how cryptocurrency is treated and what tax principles apply to transactions concerning it. Beginning with the 2020 Form 1040, one of the first questions taxpayers will be asked is whether they have made any cryptocurrency transactions. The update suggests that the IRS is starting to put the spotlight on virtual currency exchanges and crackdown on individuals who willingly fail to report gains or losses.
If anyone willfully avoids their tax obligations by hiding cryptocurrency transactions from the IRS, they may be subject to prosecution under 26 U.S.C. § 7201 – attempt to evade or defeat tax.
Earlier this year, in two separate incidents, anti-virus creator John McAfee and cryptocurrency founder "Bruno Block" were charged with tax evasion for allegedly failing to report cryptocurrency income. We can expect more and more such charges to arise as the IRS continues to focus on individuals engaged in virtual transactions.
A conviction for tax evasion can result in a fine of up to $100,000 and/or imprisonment for up to 5 years.
Generally, cryptocurrency doesn't have a central issuing authority and cryptocurrency holders must keep track of fluctuations in prices and personal transactions on their own. Many people might be unaware of their tax reporting requirements and might not realize that even if transactions were conducted through foreign exchange, they must disclose this on their tax returns.
Still, even for those individuals claiming that they did not know cryptocurrency transactions were taxable, the IRS could counter by stating that tax forms specifically ask about these types of exchanges.
If you have been accused of tax evasion in Boston, discuss your case with Martin G. Weinberg, Attorney at Law. Call (617) 227-3700 or submit an online contact form today.