An increasing number of accounting clients are using bitcoin and other virtual currencies as a means of investing and diversifying their assets. Many people fall for the common misconception that virtual currencies and profits from these currencies are somehow exempt from taxes. A lot of this stems from the fact that, until recently, many virtual currencies did not report information to the IRS. However, this is rapidly changing. Not only are these currencies completely taxable, but they are also a source of many misconceptions. As an bitcoin tax accountant, your job is to educate your clients and guide them in staying on the right side of tax law.
How Is Bitcoin Taxed? How the IRS Views Virtual Currency
Is Bitcoin taxable? As every Bitcoin tax accountant knows, the short answer is yes. The IRS does not make a significant distinction between bitcoin and other currencies. Similar to stocks, Bitcoin is treated like any financial asset. Some virtual currencies, such as Pokémon Go tokens, cannot be converted to cash. Bitcoin, on the other hand, is not the same. The sale of Bitcoin creates a profit that is absolutely taxable, similar to the sale of stocks and bonds.
On the surface, the relationship between Bitcoin and taxes is not as complicated as it may seem. The profits from Bitcoin are treated much the same way as profits from stocks and bonds. Profits and losses are events that affect one’s taxes, as with other assets that are commonly converted to legal currency. Profits can be taxed according to currency exchange rates when they are accrued. Losses similarly can be written off according to the going exchange rate at the time. Although this may seem complicated, a Bitcoin tax accountant will generally stay on the right side of IRS law by treating these accounts in a similar manner to stock trading accounts. Bitcoin taxes are not actually a complicated or unique situation.
Reporting Virtual Currency Profits
Many clients who do not understand Bitcoin and taxes do not believe that the IRS will tax Bitcoin and other virtual currencies. Some of these currencies are not currently reporting profits and holdings to the IRS. However, this is rapidly changing. The IRS has successfully sued several currencies to get this information, which means customers could be on the hook for Bitcoin tax evasion in the near future. It is essential to report Bitcoin taxes now before there are penalties involved.
Bitcoin taxes can be an expensive and complicated option for people who never exchange them for cash. Even when they are reinvested in Bitcoin or converted to other virtual currencies, the profit is taxable. Many clients may owe a tax liability even when they have not collected currency with which to pay their tax bill. This is one of the most complicated issues regarding Bitcoin and taxes: a client has to report Bitcoin taxes regardless of whether they have collected money from the currency. A Bitcoin tax accountant is essential for helping clients to recognize what they need to pay to avoid charges of Bitcoin tax evasion.
The situation with Bitcoin and taxes becomes more complicated when virtual currencies are converted to other virtual currencies. For instance, some people may convert Bitcoin to ethereum. No actual cash has been earned but the profit may be taxable. Stocks are not subject to this law due to like-kind exchange rules. In other words, when stocks are converted to other stocks, this is not taxable. The IRS has been asked to clarify whether virtual currencies are taxable when converted to other similar currencies but currently has not. It is usually best to stay on the conservative side rather than to invite future penalties or criminal charges.
Being the Bitcoin Tax Accountant That Your Clients Need
Many people are casually trading virtual currencies and making profits without understanding the tax implications. It is important to ask your clients if they trade virtual currencies and to answer their questions. Is Bitcoin taxable? How is Bitcoin taxed? Answering these and other questions is essential for any Bitcoin tax accountant. No good accountant should wait for clients to ask these and other important questions. Your clients need to be informed of the tax implications of all financial decisions they may be considering.
Your clients may not ask the important questions about Bitcoin and taxes because they do not realize how important this can be to their current and future tax situation. It is up to accountants to ensure that people are educated enough to give you the information you need to file taxes. Many clients are not aware of the tax implications of virtual currencies nor that they should be reporting these profits both to you and to the IRS. A few questions and education about Bitcoin and taxes can prevent a huge amount of future misery for many people.
