The IRS recently reminded taxpayers that income from virtual currency transactions is reportable on their income tax returns just like transactions in any other property. The IRS has issued guidance in IRS Notice 2014-21 [1] for use by taxpayers and their return preparers that addresses transactions in virtual currency, also known as digital currency.
Taxpayers must accurately report income tax implications from virtual currency transactions to avoid audits, penalties, and interest. Failure to do so can lead to criminal prosecution, including charges for tax evasion or filing false tax returns, with potential prison terms and fines up to $250,000.
Virtual currency, defined as digital value similar to traditional currency, poses challenges due to its traceability issues and pseudo-anonymous nature, potentially encouraging tax evasion. IRS Notice 2014-21 treats virtual currency as property, applying general tax principles for property transactions. This means payments in virtual currency to contractors are taxable with Form 1099-MISC, while wages in virtual currency to employees require Form W-2 reporting and are subject to income tax withholding and payroll taxes. The tax treatment of gains or losses from virtual currency sales hinges on whether it qualifies as a capital asset.
Contact a ShindelRock tax professional [2] today to ensure you are properly reporting your crypto activities.