Bitcoins And The IRS: What You Should Know

The use and popularity of bitcoins is growing rapidly across the world. Though governments are still grappling with bitcoin’s legitimacy and legal nuances, there are no signs of it disappearing any time soon. If you have bitcoins or are interested in acquiring bitcoins, this article will help you understand what bitcoins are, as well as the relationship between bitcoins and the IRS.

What Are Bitcoins?

Bitcoin and other digital currency are also referred to as “cryptocurrency.” In the case of bitcoins, they are not issued by a government or any central bank, but rather they are created or “mined” using cryptographic software operating on a group or network of miners’ computers. “Miners,” as they are called, work towards verifying and securing bitcoin transactions from one bitcoin user to another.

Who Mines Bitcoins?

These miners are a network of peer-to-peer individuals that enter data regarding bitcoin transactions into bitcoin’s public ledger, which reflects prior transactions using bitcoins on the open market. These miners enter this data into what is called a “block.” A block is verified and secured by the miners, and then added into a “blockchain.” This blockchain establishes and confirms that a bitcoin transaction has occurred, which bitcoin then uses to legitimize its actions and value of its bitcoins, and also to prevent the bitcoins from being spent more than once. This mining process confirms that a bitcoin has already been spent. Mining is the protocol or procedure by which bitcoins are introduced into the bitcoin system.

Does The IRS Recognize Bitcoins As Legal Tender?

No. The IRS does not recognize bitcoins as legal tender. However, the U.S. Government does not prevent its use for exchange of goods and services. In fact, many countries around the world have been encouraging the use of bitcoins.

Does The IRS Have Rules Regarding Bitcoin Taxation?

Yes. The IRS generally characterizes bitcoin and cryptocurrency in general, as “property” for the purposes of declaring it on your Federal taxes. However, it is also important to note that the treatment of bitcoins on your taxes depends greatly on how you hold or use your bitcoins.

Who Is Required To Declare Bitcoins On Their Taxes?

Generally, anyone using bitcoin to pay for good or services, anyone who holds bitcoins as a capital asset or property, as well as bitcoin miners.

What Form Of Bitcoin Tax Issues Might I Encounter?

If you are an individual who holds bitcoins as an asset, the same way that you would hold real estate or some other tangible asset, the IRS expects you to report the capital gains of such property on your Federal taxes. If you do not, you expose yourself to enforcement and compliance measures available to the Internal Revenue Service. If you are an employer and you pay your employee with bitcoins, this income is taxable to the employee and must be reported by the employer on a W-2 form, and is subject to all applicable tax and payroll withholding.

Can I Be Subject To IRS Tax Penalties For Inaccurately Reporting Bitcoins On My Taxes?

Yes. Inaccurately reporting bitcoins on your Federal taxes can lead to the IRS imposing monetary penalties. Also, if the IRS alleges that you intentionally withheld or knowingly failed to report bitcoins on your taxes, it may lead to other legal ramifications, including, but not limited to charges of fraud. To avoid these issues, speak with a competent cryptocurrency tax lawyer to ensure that you are meeting your obligations in reporting bitcoins or other digital currency.

How Can I Avoid IRS Issues With My Bitcoins?

You can avoid having IRS issues with your bitcoins or other cryptocurrency by consulting with an experienced bitcoin attorney. An attorney who is knowledgeable of the legal and tax issues involved in using and holding digital currency can help you avoid tax issues by advising you of your rights and obligations under the law.

What Happens If The IRS Has Accused Me Of Bitcoin Tax Evasion?

Tax evasion is a very serious allegation, which can have severe criminal and other penalties or charges including perjury for willfully failing to file, or pay taxes. Do not delay in consulting with a lawyer as soon as possible if these accusations have been levied against you.

How Can I Defend Myself Against IRS Allegations Of Bitcoin Tax Evasion?

The best and most efficient way to defend yourself is to speak with an experienced cryptocurrency tax attorney as soon as possible. Your attorney will meet with you and go over your supporting documents and tax returns in question.

Your attorney will then help you establish the best course of action in dealing with the allegations and will strategy with you to create the best defense and work towards resolving the matter without penalty.

Can My Bitcoin Lawyer Help Me Establish Mitigating Factors?

Yes. In fact, in some cases the IRS will initiate tax evasion charges against a taxpayer only to realize later that the inaccurate tax reporting, or failure to report bitcoins was the result of harmless error, or inadvertent mistake that can be resolved with the assistance of your attorney.

It is an exciting time in our history to be able to use and hold bitcoins as an alternative method of currency and as lucrative investment tool. Making bitcoins profitable for you requires adherence to various tax rules that your attorney can explain and ensure you comply with in order to make your use and holding of bitcoins a profitable one.