Cryptocurrency, which is also called “virtual currency” or “digital currency,” has become a hot topic among economists, legislators, and tax authorities over the past few years. In late 2016, a judge authorized the Internal Revenue Service (IRS) to obtain thousands of records for user transactions on Coinbase, a popular cryptocurrency exchange. Though the courts later reduced the number of records the IRS could obtain and examine, around 14,000 cryptocurrency miners, sellers, buyers, and traders remain vulnerable to the risk of an audit – or potentially even prosecution. Meanwhile, legislators have been pushing for increased regulation of cryptocurrency, including stricter reporting requirements for taxpayers. If you use or recently used cryptocurrency, you may be required to report it to the IRS on your tax forms this year. But how is cryptocurrency taxed? And are all cryptocurrencies, like Bitcoin, Litecoin, and Ethereum, taxed the same way in California? Our Roseville Bitcoin tax consultants have the answers you need to know for Tax Day 2018.
13 Types of Cryptocurrency Besides Bitcoin
In the simplest possible terms, cryptocurrency is digital money. Instead of using physical paper or coins, which is broadly called “fiat currency,” cryptocurrency users make digital transactions online. These transactions are stored in a constantly-expanding ledger called the “blockchain.”
The most popular and well-known type of cryptocurrency is inarguably Bitcoin, which was developed by an anonymous group or individual operating under the pseudonym “Satoshi Nakamoto” around 2008. However, while Bitcoin is the best-known type of digital currency, it is certainly not the only option. In addition to Bitcoin, other types of cryptocurrencies include:
- Bitcoin Cash
Does the IRS Tax Different Cryptocurrencies the Same Way in California?
Though cryptocurrency is often touted for the privacy it grants users, it is a costly mistake to assume that Bitcoin – or any other digital currencies, for that matter – are “completely anonymous,” as users and developers often claim. More and more, the federal government is working with private companies that develop software which can track crypto transactions with increasing speed, detail, and sophistication. At the same time, the government has also been working to tighten up existing tax regulations affecting cryptocurrency. Moreover, the recent subpoena of Coinbase records potentially points to the IRS taking similar actions against other crypto exchanges, such as Kraken, in the future.
Confusingly, the IRS classifies cryptocurrency not as currency, as one would expect, but property. To quote one IRS news release, “The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency.” (Notice that the IRS does not distinguish between different types of virtual currency, which are taxed in the same manner.) To make matters more confusing, the IRS’ intensified focus on cryptocurrency regulation means that the existing rules are in a state of flux, which has led to ambiguity and contradictions.
While California taxpayers are advised to consult with an experienced Roseville CPA for personalized guidance this tax season, the following rules generally apply to taxation of Bitcoin, Litecoin, and other virtual currencies in California:
- You may be required to report capital gains realized through your cryptocurrency transactions. Capital gains and losses are reported on Schedule D (Capital Gains and Losses), which should be attached to your federal income tax return, or Form 1040/Form 1040NR.
- You may be required to file an FBAR, depending on where your account or “wallet” is located. The acronym “FBAR” stands for Foreign Bank Account Reporting, or the Report of Foreign Bank and Financial Accounts. If you store cryptocurrency in a foreign account or wallet, and the contents of the account surpass certain thresholds, you may be required to file an FBAR electronically.
- You may be required to report foreign cryptocurrency assets under a law called FATCA. The acronym FATCA stands for the “Foreign Account Tax Compliance Act.” If you are required to file an FBAR, you may also be required to comply with FATCA, which means you will need to file Form 8938 (Statement of Specified Foreign Financial Assets), among meeting other IRS requirements.
Keep in mind that failure to report capital gains or foreign income, including foreign income related to Bitcoin or other cryptocurrencies, can subject you to serious financial penalties. If your tax violation was deliberate, or “willful,” you may even be at risk for criminal prosecution.
Roseville CPAs Offering Bitcoin Tax Consultations
The 2018 deadline to file your taxes, which is April 17, 2018, is coming up quickly. If you have sold, purchased, traded, saved with, paid employees with, gifted, or received cryptocurrency, you should consult with a knowledgeable tax preparer in California for Bitcoin tax help. To learn more about Bitcoin taxes and taxes on other cryptocurrencies in California, contact the Roseville CPAs of Cook CPA Group by using our online submission form, or by calling us at (916) 724-1665, for a free initial consultation.