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Virtual Currency may not be as private as previously thought.

The IRS is reviewing Virtual Currency holders (e. g. Bitcoin and related currencies) tax returns because these taxpayers may not have reported income (or paid taxes) when the currency was redeemed (used to buy goods and services), traded or sold.

The IRS is sending a series of letters to suspected virtual currency holders. Two of these letters are tactful “soft notices” asking taxpayers to review their tax records and returns to verify accurate transaction reporting and to amend their tax returns if needed.

The third notice is an implied WARNING LETTER. While it does not accuse taxpayers of fraud, it comes pretty close.  It asks the taxpayer to sign a penalty of perjury statement. If taxpayer receives this kind of letter, they need to contact their tax professional or a tax professional IMMEDIATELY!

Why are some Virtual Currency transactions taxable?

The IRS treats Virtual Currency like company stock. Virtual Currency is taxable when it is redeemed for goods and services, traded or sold.  Taxable income  is the currency value when sold or redeemed LESS purchase price or currency investment cost. If properly documented, data mining (Virtual Currency “creation”) expenses may also be tax deductible.

How’d the IRS get this information?

A guess. . . The IRS served a summons in 2017 to COINBASE–one of the Virtual Currency exchanges. Coinbase released to the IRS information on United States account holders that used their services.

TAKEAWAY: Virtual Currency Account holders should consult with their tax preparer to ensure that taxable Virtual Currency transactions are properly reported on their tax return. ANY Tax notices should be promptly addressed. For more information see: https://www.irs.gov/pub/irs-drop/n-14-21.pdf or www.irs.gov