Tax Issues

Taxation of Digital Assets

Digital currency is becoming an increasingly popular way to purchase goods, invest and trade. Users are currently navigating this bold, new online world of virtual assets to examine its effects on business, the government and life in general.  

Up until recently, digital currency losses and gains were not taxed. But now things are changing. This article will review the Taxation of Digital Assets and how much you may end up owing big brother if you’ve been engaging in this kind of online trading. 

What is Virtual Currency?

Virtual currency, or digital currency, is a virtual representation of actual money. It includes cryptocurrencies like Bitcoin, Etherium, Lite Coin and more, that involve transactions recorded on a digital ledger or blockchain.  It also includes the NFT (Non-Fungible Tokens) which are pieces of art that only exist in virtual form. 

How is Virtual Currency Treated in the Taxation of Digital Assets?

You might think that the IRS sees cryptocurrency as it would any other type of currency. However, because it is not regulated by a central bank or government, it is seen as property. As such, those who trade in cryptocurrency must report capital gains and losses in digital asset tax. 

Accounting for Bitcoin Capital Gains

Taxpayers who invest in cryptocurrency should record the value of their units when they are obtained. They should also record any amounts earned or lost when currency is traded, sold or earned. The difference between what they hold and what they originally had will be considered capital gain or loss. 

Can Using Cryptocurrency Trigger an Audit?

Many people who trade in cryptocurrency have been avoiding paying crypto tax. This makes one wonder if traders would be more likely to face an audit as compared to other taxpayers. 

In late 2016, the IRS petitioned a federal court to be granted permission to serve a John Doe summons on Coinbase, the main crypto trading platform. This allows them to file a summons against users who they believe are using crypto to engage in virtual currency tax evasion. 

Although users are fighting the IRS to prevent the release of their information, the organization will likely be able to tap into the blockchain to access the data they need. 

So, in short, yes, trading in cryptocurrency can make you more susceptible to an audit. All it would take would be for a third party who has been provided with your account information to reveal your identity and the entire thread can unravel. That’s why it’s so important to stay on the right side of the law when it comes to cryptocurrency tax reporting. 

Do I Need a Lawyer to Assist Me with Taxation of Digital Assets

In most cases, you will not need an attorney to assist you with digital currency tax matters. Your tax prep expert can give you all the help you need. However, if you find yourself in trouble due to previously unreported cryptocurrency tax, it’s best to have an experienced lawyer on your side. 

Frost Law has years of experience dealing with tax controversy cases. We will explain the ins and out of the taxation of digital assets and assist you if an issue arises. Contact us to find out how to navigate the world of cryptocurrency and keep your digital income safe.

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