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Specifically, the Notice provides that miners must recognize income for each bitcoin mined during the taxable year. TechCrunch: What do these new laws mean for miners?Ĭross: IRS Notice 2014-21 clarifies the tax treatment of bitcoin miners. Personally, I have seen the havoc wreaked on people’s lives by tax crimes and I would never want to be in their shoes. That’s not to mention the possibility of a felony criminal conviction and prison sentence. If you are caught, though, the amount of money you’ll be forced to pay in penalties and interest will drastically exceed the amount you saved. Alternatively, you can violate the law and hope that you don’t get caught. You can comply with the law and pay taxes just like everyone else, which is admittedly unpleasant. You can also add to this the additional penalties for failing to report foreign financial accounts, which can be even more severe.Īt the end of the day, you have a decision to make. This includes the possibility of criminal prosecution. The fact is that penalties for failing to report income are significant. That might sound ridiculous to some people given the inherent anonymity of bitcoin, but there are some very rich people in prison right now who used to think the same thing about their Swiss bank accounts. There’s also that nice reward the IRS will pay them for their efforts.įourth, you voluntarily and accurately report your gains on your tax return. The simple fact is that people get jealous, and if they’ve heard that you’ve made lots of tax-free money with bitcoin, they might get tempted to make sure justice is served. Third, someone can report you to the IRS, which happens far more often than you might think. Although FinCEN is generally concerned with money laundering activities, the IRS does have access to FinCEN filings and it is common for IRS special agents to participate in FinCEN investigations. The larger and/or more frequent you SAR filings, the more likely they will become a legitimate red flag and trigger an investigation.
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Out of an abundance of caution, many banks automatically treat all international transfers as “suspicious.” So, if you’ve sent or received a wire transfer of more than $5,000 to/from an international bitcoin exchange like Mt.Gox or BTC-e, you can be pretty sure that your bank has already filed a SAR against you (although they are prohibited from telling you if they did, so you’ll never know for sure). The meaning of “suspicious” is very vague and highly discretionary. banks and bitcoin exchanges are required to file SARs for wire transfers that are “suspicious” and larger than $5,000 ($2,000 in the case of bitcoin exchanges). Second, your bank or bitcoin exchange might file a Suspicious Activity Report (“SAR”). Note that they would need your Social Security number to file a 1099 in your name, so a request from your bitcoin exchange to provide your Social Security number may be indicative of a 1099 filing. Thus, unless the exchange voluntarily files a 1099 against you, it is unlikely that the IRS will receive a report of your bitcoin transactions. However, it does not appear that bitcoin exchanges are currently subject to the 1099 reporting requirements (although that will probably change in the future). This would be done with a Form 1099, which you’ve probably encountered at one time or another in a different context. First, your bitcoin exchange may report your transactions to the IRS. Here are four ways that can happen (others may exist). This means that it has no knowledge of your bitcoin unless someone tells them. TechCrunch: How will the IRS find out about our bitcoin? Can they?Ĭross: As a general rule, the IRS only knows what it is told. I spent the next ten months exhaustively researching the proper tax treatment of bitcoins and ended up developing a real passion for this area of the tax law.
#Bitcoin expert advice professional
It wasn’t until spring of 2013 that really took a professional interest in bitcoins from a tax perspective. Unfortunately, I didn’t have the foresight to view them as a potential investment opportunity, although I admired their possible application in the banking and finance industries. How did you get involved in bitcoin?Ĭross: I first learned about cryptocurrencies in early 2012 when I came across a law review article discussing their legal uncertainties. I asked Cross to walk us through the recent ruling and what it means for Satoshi-ites. The owner of BitcoinTaxSolutions, Cross handles tax returns and offers tax planning with a focus on cryptocurrency. Given the recent ruling that BTC are property, not currency, things can get kind of hairy when mining, buying, or trading your BTC.
#Bitcoin expert advice how to
As we approach tax day, many bitcoin fans may be wondering how to handle all of their newfound wealth.