There has been rapid growth in the number of people using virtual currencies, like Bitcoin, in the last few years. According to an article in The Tax Advisor, the IRS is beginning to watch this activity more closely. The underreporting of income from virtual currency transactions is potentially staggering. The IRS is beginning to aggressively pursue such transactions. In 2017 the IRS was able to obtain over 14,000 names of customers from Coinbase, a digital currency marketplace. Many people believe that digital currency transactions are not traceable, but that is not true. Each transaction leaves a digital trail that cannot be erased.
The first IRS guidance was published in 2014, in which some digital currencies, such as Bitcoin, were determined to have an equivalent value to real currency, because it can be traded or exchanged into real currency. The IRS treats virtual currency as property for tax purposes, and applies tax principles applicable to property to transactions of virtual currency. Because of this, many people have been treating transactions as like-kind exchanges that would defer the tax. However, the new tax reform eliminates the possibility of that tax treatment after Jan. 1, 2018. It is more important than ever for those involved in virtual currency transactions to seek the advice of their tax professional for the proper reporting and treatment of gains and losses from such transactions. For more information contact us in one of our many locations.