Changes Expected to Cryptocurrency Taxes on Transactions
IRS Notice 2014-21 stated the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability. This mandate, however, left many federal tax questions unanswered. Although the IRS bases cryptocurrency taxation on fair market value on receipt, several issues continue to lack clarity on determining this. A few months ago, the IRS commissioner indicated the IRS will soon publish clarifications.
The IRS has ruled to consider cryptocurrency property rather than currency. This decision, in addition to the increased complexity of crypto, has convoluted taxation of crypto transactions. Among new questions raised concern the advents of forks (software upgrade and updates that can or cannot be backward-compatible) and airdrops (a procedure for distributing new tokens and coins). These have prompted questions for the IRS because they essentially provide people free cryptos.
Several software platforms exist for calculating cryptocurrency taxes. Currently, the IRS allows users to choose their preferred method. Perhaps, these confusions have contributed to many taxpayers avoiding disclosure of their crypto earnings. The IRS has investigated this situation and found thousands of taxpayers have neglected to report income from cryptos. As a result, the IRS has sent letters to digital currency holders who failed to file or may have improperly reported taxes. The IRS notices instructed taxpayers to take filing situations seriously and, in some cases, threatened possible criminal prosecution.
In conclusion, cryptocurrency transactions raise complicated tax issues. We recommend holders and traders consult with their tax professional to ensure paying taxes correctly, and tax plan. For our clients, we provide free tax planning advice concerning any tax issue and invite everyone with questions to contact us.
Professional Tax Services is a locally owned provider serving over 3,500 local residents and businesses. For more information call 661-259-1967 or visit www.scvprotaxservices.com. Through their complimentary EZ2 Thrive program, they provide unlimited free tax planning advice to their clients.
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