Sold Bitcoin or other digital currencies? Don’t be surprised if the IRS comes knocking on your door looking for any taxes due, says a recent Wall Street Journal article.
The Internal Revenue Service is sending warning letters to more than 10,000 Bitcoin and other cryptocurrency holders, reports the Journal. It got their names from a popular coin exchange site under federal court order.
There’s no tax problem with buying Bitcoin or other currencies. But selling them (or spending them to buy other goods) may present a few complications.
Selling cryptocurrencies can generate capital gains or losses, just like with stocks, exchange traded funds, or mutual funds.
Not reporting and paying taxes on those gains could generate serious tax penalties, so if you get one of the IRS warning letters, don’t ignore it, say experts.
Some cryptocurrency fans complain that the IRS hasn’t sufficiently fleshed out guidance on how digital currencies should be treated for tax purposes.
But what’s clear is that you need to keep good records so you can report any capital gains or losses earned on your investment. “The IRS relies upon the taxpayer to correctly track and pay tax on Bitcoin and other crypto currencies. Even if the IRS doesn’t know about your Bitcoin activities you are still responsible for complying with the tax code,” says financial planner David John Marotta, who writes a column for Forbes.
As with more mainstream investments, you’ll owe tax on any capital gains earned, either at favorable long-term rates (for holding periods of longer than one year) or less attractive short-term rates (for holding periods of one year or under). Losses can be used to offset other gains.