One of the key issues when it comes to taxation of cryptocurrency is its basic definition. Is cryptocurrency property or money? It may not seem like an important distinction, but the answer directly impacts the application of federal tax laws on this form of currency.
What is the difference between property and money? The Internal Revenue Service (IRS) generally considers money as income. This means a gain on currency is generally subject to a 39.6 percent taxation rate. In contrast, a gain on the sale of property is generally subject to a 23.8 percent taxation rate.
Has the Internal Revenue Service (IRS) clarified the issue? The IRS did provide some guidance with Notice 2014-21. In this publication, the agency states that virtual currency, like Bitcoins, are treated as property for tax purposes.
Is it really that simple? Unfortunately not. Tax issues may be present depending on the purpose of the cryptocurrency. A distinction due to the purpose of the digital currency may also apply. Intended use as an investment or as inventory may impact tax obligations.
Navigating this distinction is complex and the IRS notes that penalties will apply in the event that a taxpayer fails to comply with his or her tax obligations. However, it is also important to note that remedies are available in the event a taxpayer is accused of failing to meet these obligations. Penalties may not apply in the event the taxpayer can establish that he or he has reasonable cause for the error. Putting together a case to satisfy the IRS is not an easy task. As such, it is wise to reach out to an experienced attorney for aid in this matter.