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Will the IRS Audit Me Based on Cryptocurrency Transactions?

Posted on in Tax Services

Texas IRS audit helpVirtual currencies such as Bitcoin and Etherium have become very popular over the last several years, and many people invest in these cryptocurrencies, trade them with others, use them to purchase goods and services, or receive them as income. Because of this increase in financial activity, the IRS has begun to pay more attention to these types of transactions, and it has increased the number of tax audits of people who buy, sell, or exchange virtual currencies. Users of cryptocurrencies will want to understand their requirements for reporting transactions and paying taxes to ensure that they can avoid penalties from the IRS.

How the IRS Addresses Cryptocurrencies

Even though virtual currencies are often used to purchase goods and services, they are not treated the same as currency issued by the United States or another country. Instead, they are considered to be property, and cryptocurrency transactions are taxed the same as those involving other forms of property.

When a person sells virtual currency, transfers it to someone else, or exchanges it for goods or services, they will be required to recognize any gains or losses, and capital gains taxes may apply to these transactions. The gain or loss will be the difference between the amount received in exchange for the virtual currency and the person’s basis in the cryptocurrency. The basis is the amount that was originally spent to acquire the virtual currency, including any fees or commissions. The basis may be adjusted based on certain types of expenditures, deductions, or credits.

In addition to reporting gains and losses in cryptocurrency transactions, a person will also need to report virtual currency earned as income. Virtual currency paid to an employee or independent contractor is considered the same as monetary wages. In addition, any cryptocurrency earned in exchange for performing services should be recognized as income. This income will be subject to federal income tax withholding, and it must be reported on a W-2 form.

Contact a San Antonio Tax Consultant for Help Reporting Virtual Currency Transactions

If you own any virtual currency, have received cryptocurrency as income, or have sold or exchanged this type of currency, you will want to make sure you understand your tax reporting requirements. Ed Villanueva & Associates, Inc. can help you determine the best ways to address these issues, and if you are facing a tax audit, we can ensure that you provide the correct information to the IRS and take the right steps to minimize any potential penalties. To get help with tax-related issues, contact our Corpus Christi tax agent at 210-382-9015 and set up a free consultation.

 

Sources:

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

https://www.forbes.com/sites/irswatch/2020/05/29/got-cryptocurrency--get-ready-for-an-irs-audit/?sh=5f76907a1231

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