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“Tax Thoughts” on Digital Currency

Many people are excited about digital currencies like Bitcoin because people are making significant profits from these types of investments.  If you or someone you know is considering digital currency here are a couple of “tax thoughts” to help clear up some of the confusion about digital currency and taxes. The IRS’s tax guidance on digital currencies has made it clear that some transactions do trigger a tax event and possibly a tax liability for those involved.

There are two types of applicable tax rates:

  1. If you hold the investment for less than 1 year your tax rate could be between 10% – 39.5%

  2. If you hold the investment for more than 1 year your tax rate could be between 0% – 20%

Various groups of people are impacted:

  1. Employers and business owners: If you pay your employees, contractors or vendors with digital currency the IRS expects you to withhold and/or report these payments with your tax filings.

  2. Employees, contractors and vendors: If you are paid in digital currency, the IRS expects you to include this in your wages and revenue on your tax return (for example Bitcoin Miners are treated like contractors for tax purposes).

  3. Users that exchange digital currency for goods or services are expected to compare the purchase price/value of the digital currency when it was received to the value of the goods or services being exchanged to determine if you have a tax liability.

At the moment the IRS does not have a process to track digital currency transactions, but reports claim that the tax agency is in the process of developing data analytics and tracking techniques with multiple third party companies.  Also note that the IRS normally has a three-year statute of limitation on audits (for example a 2017 tax return can still be selected for an audit in 2020).

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