Over the past several years, cryptocurrencies have become popular with investors… and the IRS. Investors of various virtual currencies have ignored or tried to slip past the guidelines on how it's considered taxable. On the same token, tax preparers for crypto investors haven’t stayed informed enough about the implications their clients can face. It’s crucial everyone stays better informed as the IRS continues to increase its task force and tighten its parameters on virtual currencies.
All virtual currencies are considered property under U.S. tax law by the IRS. To easily compare, virtual currencies are viewed like real estate. Upon the sale or acquisition of the funds, whatever capital gains or losses are incurred are deemed taxable by law and must be stated on an individual’s tax return. This has been a known fact since 2014, however, errors have still occurred over the years and now are resulting in major penalties for some.
More than 10,000 cryptocurrency investors have received a letter in the last few years from the IRS stating that those who own virtual currencies and potentially failed to pay the necessary taxes or improperly report them on their tax returns, need to review, amend, and pay whatever back taxes that are due. As a tax professional, make sure you are asking your clients if and when they’ve invested in virtual currencies so you can help them by going over tax documents and ensuring they are accurate and compliant.
Earlier this year, the IRS doubled down on summoning digital currency brokers of varying sizes to provide accurate data on users and their earnings. The pressure is being felt by anyone who thought they could evade the IRS by not having their earnings on virtual currency reported.
There are serious implications investors and tax professionals could face by not coming forward sooner to report cryptocurrency earnings this tax season. Make sure you are staying up to date on current tax laws and what to expect. Stay informed on all of the legalities surrounding virtual currency and other important topics to be best prepared in servicing your clients for the upcoming tax season!