What has happened?
The Internal Revenue Service has reminded US taxpayers to include income from virtual currencies on their annual tax returns.
What does this mean?
In a release, the IRS said that cryptocurrency transactions are "taxable by law just like transactions in any other property", which echoes IRS guidance from 2014 on the taxation of virtual currencies.
"A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property," the statement explained.
The IRS also warned that:
"Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest."
The penalties could include criminal prosecution "in more extreme situations".
Criminal charges include tax evasion and anyone convicted of this crime could face up to five years' imprisonment and a fine of up to $250,000.
Filing a false tax return – another criminal charge – carries up to three years' imprisonment and a similar $250,000 fine.
The release then explains what a virtual currency is, noting that there are than 1,500 known ones.
"Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS," the IRS said.
The statement also listed some of the implications of virtual currencies being taxed in the same way as any property transactions.
Among other things, this means that:
- "Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue Form 1099-MISC.
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
- Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer."
Receive free news and analysis – written by Hogan Lovells' world-leading legal teams and tailored to your preferences – by registering on Engage. You can also access our cutting-edge interactive Lawtech tools, designed to help you make better decisions and save time and money.
You can also keep track of all the Engage content by following our LinkedIn page.