The Internal Revenue Service is sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. This is a part of the IRS’s larger efforts of educating virtual currency owners about the tax implications and, if necessary, advising them to pay back taxes and file amended returns.
IRS Notice 2014-21 (https://www.irs.gov/pub/irs-drop/n-14-21.pdf) states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. ● Taxpayers who receive virtual currency as payment for goods or services must include the fair market value of the virtual currency in computing gross income. ● When a taxpayer exchanges virtual currency for other property (even if it’s another virtual currency), the taxpayer has taxable gain if the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency. ● Virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes and are subject to federal income tax withholding, FICA, and FUTA taxes, and must be reported on Form W-2. ● Virtual currency received by an independent contractor for performing services constitutes self-employment income.
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are liable for the back taxes as well as penalties and interest. Taxpayers who willfully attempt to defraud the IRS could also be subject to criminal prosecution.

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