In 2018, the IRS announced its Virtual Currency Compliance campaign that addresses tax noncompliance related to the use of virtual currency. According to the IRS, this past summer it began sending letters to taxpayers that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transaction properly. Two of the letters ask taxpayers to review their records and amend their returns as needed. The third letter ask the taxpayer to sign penalties of perjury statements that they were following the law.
These IRS efforts not only include the purchase of virtual currency that is held for investment, but also the reporting of income using virtual currency in exchange for property or performing services as an employee. The fair market value of virtual currency is determined in U.S. dollars as of the date of payment or receipt. The taxpayer may realize and consequently have to report a gain or a loss for the exchange of virtual currency for other property, or on the sale or exchange of virtual currency.
The IRS is actively addressing potential non-compliance in this area through a variety of efforts, ranging from taxpayer education, to audits, to criminal investigations. Please contact Kakenmaster & Associates if you receive any of these letters or have questions regarding the reporting of virtual currency.