Failure to properly declare and pay taxes on cryptocurrency transactions may be a civil or criminal violation of federal tax law, as well as a violation of state tax law, which could result in steep financial liabilities, said New York Attorney General Letitia James.
As the tax filing deadline approaches, James encourages crypto investors and their tax advisors to consult guidance from state financial departments and the Internal Revenue Service to accurately file their taxes and avoid penalties.
“Crypto investors, just like working families and everyone else, must pay taxes,” she said. “Cryptocurrencies may be new, but the law is clear: Investors must accurately report and pay taxes on their virtual investments.”
Recently there has been a dramatic surge in the production, sale, and acquisition of “virtual” or “crypto” currencies such as Bitcoin and Ethereum. Virtual currency is taxed in the same way as any other assets, such as stocks and gold.
In addition, the IRS says that taxpayers who receive “virtual currency as payment for goods or services, must, in computing gross income, include the fair market value of virtual currency, measured in U.S. dollars, as of the date that virtual currency was received.”
An exchange of virtual currency for other property that results in either a gain or loss needs to be reported by taxpayers. For example, taxpayers must calculate and report any gain or loss when using cryptocurrency to purchase a luxury electric vehicle, a plane ticket, or even a cup of coffee.
Taxpayers should review guidance set out in the IRS and the state where they live to determine tax due on their cryptocurrency transactions.
Anyone with information relating to a taxpayer’s willful failure to report income involving cryptocurrency can report it to the IRS’s Whistleblower Office.