Tax Preparation for a Digital World

It is extremely evident that technology has drastically changed our world over the past few decades. Especially in the way we do business. This causes our laws to be affected as well. One prime example of technology affecting law and business is the rise of digital currency and the bitcoin. Tax professionals must be acutely aware of the laws related to bitcoins and how they are to be treated when a situation arises with a client’s tax return.

It is estimated that over 1 million individuals in the United States own bitcoins and over 10,000 of them own over $10,000 worth. What many of them do not realize is that their activity will result in tax consequences. In March of 2014, the IRS issued notice 2014-21 regarding the tax implications of virtual currencies. According to this document, digital currencies shall be treated as property for federal tax purposes, and tax preparers should apply the principles of property transactions. You can find the full document with all the necessary information here

In order to provide your clients with the best service possible, tax preparers should assume all their clients are unaware of the repercussions of owning digital currency. It is recommended that tax preparers take the following steps to ensure your client’s tax return is filed properly and they are not at risk of noncompliance.

  1. Inquire if the client had any virtual currency transactions during the year
  2. Determine how the client obtained the virtual currency (mining, purchase, or in exchange for goods or services)
  3. Identify taxable virtual currency transactions and determine the appropriate tax treatment
  4. Determine information-reporting requirements such as Forms W-2 and 1099 reporting
  5. Discuss the need to maintain records regarding virtual currency transactions
  6. Discuss the volatility and theft risks of holding virtual currency

Technology has penetrated every facet of our lives so it is always important to be aware of the newest trends and topics to make sure we stay at the top of our game. To refresh yourself on all the newest policies and procedures handed down by the IRS be sure to take part in the Annual Federal Tax Refresher program each year. The AFTR was designed specifically to benefit the independent tax preparer. The Annual Federal Tax Refresher course is included within the AFSP and the outline is provided directly by the IRS. This ensures all courses have the proper material to keep all tax preparers current with all new tax laws. Upon completion, you will be placed in a directory of tax return preparers with select qualification on the IRS website. For more information on the AFTR go to: