Virtual Currency Subject to REAL Taxes

Virtual currency is an ongoing focus area for IRS Criminal Investigation

Virtual currency is defined as a type of unregulated digital money that, in most cases, is controlled by its developers. There are basically two types of digital currency: virtual currency and cryptocurrency (study.com).

Types of Digital Currency

Virtual currency is typically only valid within its specific digital community. It cannot be converted into cash to make other purchases.

Cryptocurrency can be converted into real-world money. Bitcoin, for example, is cryptocurrency.

Bitcoin has risen almost 200% this year, according to an article appearing on cnbc.com. The article explains that the possible reason behind this increase is due to something called “the halvening.” The end result is an increase in demand for the bitcoins, thus, driving up the price.

Tax Consequences of Digital Currency

The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.

The IRS has run out of patience with virtual currency and is tightening the reins. New guidance has been issued for individuals and businesses that use virtual currencies.

The IRS has begun sending letters to virtual currency owners advising them to pay back taxes and/or file amended returns.

The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

10,000 Taxpayers Expected to Receive Educational Letters

The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174, or Letter 6174-A. All three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.

Last year the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

Some Taxpayers May Be Subject to Criminal Prosecution

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

If you receive an educational letter related to virtual currency, you should contact your tax professional immediately.