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The IRS & Virtual Currency Taxation

August 5, 2019

The IRS recently released a statement discussing its latest attempt to enforce tax collection. The recent statement relates to cryptocurrency and non-crypto virtual currency taxation. The statement is IR-2019-132. It describes how the IRS is sending out over 10,000 letters to taxpayers as part of a tax enforcement effort. The letters is addressed to taxpayers suspected of having engaged in taxable virtual currency transactions and may have resultant liabilities. These letters are part of a campaign to compel tax payments from taxpayers with tax liabilities resulting from virtual currency.

Virtual Currency Taxation in a Developing Field

The taxation of virtual currency is still a developing field. However, back in 2014, the IRS released an important document in this field. That document, known as Notice 2014-21, provides basic guidelines for the taxation of virtual currency. 

In this post, we’ll provide background on the recent IRS statement. We’ll do so by also discussing some of the material contained in IRS Notice 2014-21. We’ll start by going over the compliance letters sent out to taxpayers, in detail. Then we’ll discuss why taxpayers who have liabilities stemming from virtual currency should proactively settle their tax burden.

As the recent statement makes clear, the IRS is serious about its effort to enforce virtual currency taxation and collection. In fact, the IRS has made it clear that criminal prosecution can occur in cases involving evasion or fraud. 

Background: IRS Notice 2014-21 Treats Virtual Currency as Property 

In its IR-2019-132 statement, the IRS made reference to its earlier document on virtual currency, IRS Notice 2014-21. This notice is a very important document. That’s because it attempts to apply preexisting tax principles to virtual currency in a more or less straightforward manner. According to Notice 2014-21, virtual currency is “property”. This means that it will receive tax treatment akin to other kinds of similar property, such as stocks and bonds. Nonetheless, virtual currency will have its own asset class.

Acquisition and Holding

The taxation of virtual currency depends on how a taxpayer acquires and holds it. If a taxpayer holds virtual currency as a capital asset, then income from its sale receive capital gains tax treatment. If, however, virtual currency is sold as part of a business, it may be subject to ordinary income tax treatment.  

Mining Virtual Currency

When a taxpayer “mines” virtual currency, the IRS considers that taxpayer to receive gross income from such activity. Furthermore, if a taxpayer mines virtual currency as part of a trade or business, that taxpayer will also be responsible for self-employment tax. A taxpayer receiving virtual currency as wages is also liable for tax based on the fair market value of the currency when it’s received. Again, all of this is consistent with the classification of virtual currency as a type of personal property.  

IRS Compliance Letters: 6173, 6174 & 6174-A 

As part of its collection efforts, the IRS will send out over 10,000 letters to taxpayers by the end of August. Taxpayers will receive one of 3 letters: Letter 6173Letter 6174 and Letter 6174-A. If you review these letters, you’ll notice that they are quite similar and display only minor variations. Essentially, the letter states that the IRS believes that the taxpayer has one or more virtual currency accounts. It goes on to state that the IRS suspects that the recipient may not have paid their corresponding tax liability. The letters then give reporting instructions for the virtual currency and emphasize the severity of the situation. As mentioned, the IRS is taking virtual currency quite seriously. The letters make reference to the fact that criminal prosecution could occur in the case of suspect tax crimes.  

Virtual Currency Users Should Attempt to Settle Their Tax Burden 

Those with tax liabilities from virtual currency transactions should proactively come forth and resolve their IRS debt. Doing so can have a very positive effect on how the situation is handled.

Let’s face it, virtual currency is still new. Accordingly, the IRS isn’t trying to unjustly penalize users for not understanding the full tax implications of this asset. But, users can’t plead ignorance forever. Especially not after the IRS makes public statements such as IR-2019-132 . Given what’s at stake, taxpayers are strongly recommended to come forward. The wise move is for them to proactively disclose virtual currency transactions right away. Avoiding the issue will undoubtedly make the situation worse. It may even lead to serious negative future consequences, including criminal prosecution.

Reach Out to MC&C Today for More Information 

As mentioned, virtual currency taxation is still in its early stages. The IRS has been scrambling to catch up as the virtual currency world has progressed. IRS Notice 2014-21 is a help in clarifying the situation. But if you engage in virtual currency transactions, you should consult with a qualified CPA or tax attorney. At Mackay, Caswell & Callahan, P.C., we can help with tax debt from virtual currency. Our attorneys are up-to-date with cutting-edge research and have a a solid grasp of the relevant tax principles. In addition to virtual currency taxation, we also know about income tax debt resolution, 1031 exchanges, voluntary disclosures, and more. If you need assistance, please, reach out. One of our top New York City tax attorneys will help you right away. 

Image credit: https://www.comparitech.com/ 

Comments

IRS Notice 2014-21 & Virtual Currency – Mackay, Caswell & Callahan, P.C. 2 weeks ago

[…] In a previous article, we discussed in detail the content of a recently IRS statement on virtual currency tax collection. The statement, IRS Notice IR-2019-132, says 10,000+ letters will be sent out this month to individuals with virtual currency accounts. In its statement, the IRS also made reference to an earlier piece of material on virtual currency. This earlier document is IRS Notice 2014-21, and it discusses the tax principles which apply to virtual currency. IRS Notice 2014-21 is a fairly important document. That’s because it lays out the IRS’ position on the taxation of bitcoin and other virtual currencies. Before this document, the IRS’ stance was more or less unknown. With publication of the Notice, though, we got a sense of how virtual currencies will be treated for tax purposes.  […]

Cryptocurrency FBAR Filings – Mackay, Caswell & Callahan, P.C. 2 weeks ago

[…] currency is still questionable as a medium of exchange. But, as we’ve also written, the IRS is showing a willingness to recognize tax liabilities on virtual currency gains. Does […]

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Comments

IRS Notice 2014-21 & Virtual Currency – Mackay, Caswell & Callahan, P.C. 2 weeks ago

[…] In a previous article, we discussed in detail the content of a recently IRS statement on virtual currency tax collection. The statement, IRS Notice IR-2019-132, says 10,000+ letters will be sent out this month to individuals with virtual currency accounts. In its statement, the IRS also made reference to an earlier piece of material on virtual currency. This earlier document is IRS Notice 2014-21, and it discusses the tax principles which apply to virtual currency. IRS Notice 2014-21 is a fairly important document. That’s because it lays out the IRS’ position on the taxation of bitcoin and other virtual currencies. Before this document, the IRS’ stance was more or less unknown. With publication of the Notice, though, we got a sense of how virtual currencies will be treated for tax purposes.  […]

Cryptocurrency FBAR Filings – Mackay, Caswell & Callahan, P.C. 2 weeks ago

[…] currency is still questionable as a medium of exchange. But, as we’ve also written, the IRS is showing a willingness to recognize tax liabilities on virtual currency gains. Does […]

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