Cryptocurrency, or digital currency, is a fairly new way to conduct financial transactions. Although relatively novel, taxpayers have used digital currency like Bitcoins to purchase real estate and other tangible items, and the Internal Revenue Service (IRS) has taken notice.
In response to the growing rate of these transactions, the IRS recently announced it is sending out letters to those who hold digital currency with reporting information.
What type of reporting rules apply?
Within the publication, the agency stated it expects taxpayers to report digital assets that are “convertible into cash.” This means capital gains rules would likely apply.
What happens if taxpayers do not report?
They could face criminal charges. Depending on the extent of the charges, the IRS could push for steep penalties and even potential imprisonment.
Will the agency offer an amnesty program?
Taxpayers may remember the IRS and Treasury Department allowed taxpayers who failed to report foreign assets to self-report and partake in an amnesty program. Taxpayers who chose to come forward and report the presence of these accounts and paid applicable taxes and fees were generally free from the threat of imprisonment.
At this time, the agency has stated it will not offer a similar program for those who fail to report cryptocurrency.
How will taxpayers know if they are required to report?
The agency is sending out thousands of letters. These letters come in one of three forms, with each providing information on potential issues and instructions to come into compliance.
Taxpayers who receive a letter from the IRS are wise to take the matter seriously. A failure to act can result in an increase in financial penalties and additional charges.