Freelancers Beware! The IRS is Targeting Taxpayers Dealing in Cryptocurrency

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Freelancers Beware! The IRS is Targeting Taxpayers Dealing in Cryptocurrency

If you are like many of the freelancers who are involved with cryptocurrency, you may be unaware of the tax rules related to it. This is evidenced by last Friday’s news that the Internal Revenue Service (IRS) is sending “educational letters” about tax penalties and obligations to more than 10,000 cryptocurrency holders. It is likely there are many more people out there who do not know the related rules. If you have not reported virtual currency income or you have failed to pay tax on it, now is the time to make sure you come into compliance before the IRS contacts you.

Here is how the IRS is cracking down on taxpayers with cryptocurrency income.

With its first wave of letters to taxpayers with virtual currency transactions who may have failed to report income and pay the resulting tax, the IRS is issuing a stern warning to take seriously the obligation of reviewing and amending previous returns and paying back taxes, interest and penalties when necessary. The consequences of not doing so can mean hefty fines and even criminal prosecution.

The IRS started sending educational letters last week to taxpayers whose names were obtained through the agency’s various compliance efforts. It is expected that by the end of August more than 10,000 taxpayers will receive these letters. If you are one of them, you will receive one of three variations: Letter 6173, Letter 6174 or Letter 6174-A. No matter which one you receive, the goal is to help you understand your tax and filing obligations and how to correct past errors by visiting IRS.gov.

Even if you don’t receive a letter this time around, be certain that if you do have virtual currency income you need to be compliant with all tax laws because this is an area of focus for the IRS and it is expected that they will expand to other virtual currency exchanges in the future. The IRS will also be actively addressing non-compliance related to virtual currency transactions using tactics such as taxpayer education, audits and criminal investigations. The IRS is planning to issue additional legal guidance in this area soon.

A quick overview of virtual currency tax rules.

For tax purposes cryptocurrency is not treated like cash. It is treated like stocks, bonds, and other investment properties. You need to report your holdings, gains and losses on Form 8949 and 1040 Schedule D at tax time. When you trade cryptocurrency to cryptocurrency (calculating its fair market worth in US dollars) or to a fiat currency like the dollar it is a taxable event. It is also a taxable event when you use cryptocurrency to purchase goods and services. You may also end up owing sales tax.

Buying cryptocurrency with U.S. dollars is not a taxable event because you are not realizing gains when you do so. If you trade one type of virtual currency to the same kind in a wallet-to-wallet trade you may not obligated to pay tax, but you do have to account for it, depending on the exchange you are using. Make sure to check the tax rules of the specific exchange and the IRS accordingly.

Gift tax rules apply if you give cryptocurrency as a gift that is larger than the annual exclusion amount, which is $15,000 for 2019. The recipient inherits the cost basis and will owe tax when they sell or trade it.

If you are mining and using virtual currency as a business the general rule is that you must account for the dollar value of the coin at the time you received it and again when you trade it or use it. If you make a payment in cryptocurrency you must report it as well. If you receive a payment in cryptocurrency for your business, it is a taxable event. The rules for businesses are complex, so consider seeking the advice of a tax professional to help you.

One of the key things to remember when it comes to taxes and virtual currency is that you must keep track of your gains and losses each year and deduct this from your cost basis. This makes it vital to keep track of the value of any trades you make in U.S. dollars at the time of the trade.

No matter whether you are using cryptocurrency personally or for your freelance business, you must report your activity and pay tax on your assets. You can find additional information on the tax treatment of virtual currencies on IRS.gov.

Catch yourself up on virtual currency taxes before the IRS “educates” you.

If you think you might owe taxes from past years, file an amended return now—before you receive an “educational” letter from the IRS. If you are one of the 10,000 recipients of an IRS letter this August, be sure to take appropriate action if necessary. Don’t ignore it or you face the risk of fines, penalties or even legal action.