U.S. taxpayers are required to report income from virtual currency transactions, the Internal Revenue Service has advised taxpayers in a notice.
The agency has provided guidance on virtual currency in IRS Notice 2014-21 for taxpayers and tax preparers.
Just like transactions in any other property, virtual currency transactions are taxable. Those who fail to report the income tax consequences of such transactions can be audited and possibly liable for interest and penalties, the IRS noted.
Taxpayers can also be subject to criminal prosecution in extreme situations for not properly reporting the income tax consequences of virtual currency transactions. Criminal charges include filing a false tax return and tax evasion.
Persons convicted of tax evasion are subject to a fine of up to $250,000 and a prison term of up to five years. Those convicted of filing a false tax return are subject to a fine of up to $250,000 and a prison term of up to three years.
Virtual currency is generally defined as a digital representation of value functioning in generally the same manner as a nation’s traditional currency. Since virtual currency transactions can be hard to trace and have an inherently “pseudo-anonymous” aspect, taxpayers can be tempted to hide taxable income from the IRS, the notice stated.
Virtual currency is treated as property for federal tax purposes, according to Notice 2014-21. General tax principles apply to property transactions that use virtual currency. This includes the following rules:
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