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Will the IRS Audit Me If I Purchase Virtual Currency?

In 2009, bitcoin—the first cryptocurrency—emerged and completely disrupted the traditional landscape of trading, investing, and exchanging money. Over the past decade, virtual currency has continued to gain traction and popularity. Today, it is common for investors to use a cryptocurrency broker to buy, sell, and exchange digital currency. Online brokers, such as Coinbase, TradeStation, and Etrade, handle thousands of virtual currency transactions every day.

It’s no surprise that the IRS has taken note of the increasing popularity of cryptocurrency. In some cases, the IRS has forced online brokers to release user information to ensure virtual currency owners are paying taxes on their virtual currency gains. If you are a virtual currency owner, it is important to understand the tax regulations surrounding this new form of money. If you aren’t careful, the IRS can gather information on your transactions from online brokers and use it to open an audit or criminal tax investigation.

If you are facing civil or criminal penalties from your virtual currency transactions, it is important to consult with an experienced tax attorney.

How is Virtual Currency Taxed?

Virtual currency is usually taxed as property, making it subject to the capital gains tax. In and of itself, purchasing virtual currency is not a taxable transaction. However, selling the currency or using it to make purchases constitute transactions that are taxed by the IRS. This means that virtual currency owners need to keep track of the market value of the virtual currency they own. This information can be found on virtual currency exchange and broker sites.

To calculate the capital gains tax you need to report on your tax return, you will subtract the price at which you bought your currency from the selling price. If you owned your virtual currency for less than a year before selling, you are eligible for a short-term capital gains tax, which is usually in the ballpark of your income tax rate. Virtual currencies that are held for more than a year will be taxed at the long-term capital gains rate, which is usually around 23 percent.

Virtual Currency and Exchange Websites

In the early days of cryptocurrency, the IRS hadn’t figured out how to accurately track virtual transactions made using cryptocurrency commodities. Since then, the agency has quickly learned how to track virtual currency to a high degree of accuracy. This is mainly a result of requiring virtual brokers to release information on their users’ transactions.

When the IRS obtains a court order that requires exchange sites to release user information, they can check a user’s tax returns to ensure they properly reported their capital gains. If the information doesn’t match, the IRS will most likely start an audit. When deciding whether to pursue civil or criminal penalties, the auditor will attempt to determine whether your inaccurate reporting was genuine oversight or willful.

As soon as you are informed of an IRS audit, it is imperative that you contact an experienced tax attorney. While the penalties of inaccurate reporting depend on the specifics of the situation, in some cases, you could face fines of up to $250,000 and jail time.

Consult a Skilled Tax Resolution Attorney

If you own, sell, and exchange virtual currency, the best way to avoid getting audited is to consult with an experienced tax attorney. At Morgan Sebastian Law, attorney Becky Sebastian is eager to help you navigate the complexities of your tax situation. We understand that accurately reporting capital gains tax can be a challenge, and we can help with that. Additionally, if you end up being audited by the IRS, she will work to mitigate the damage and protect your rights.

To schedule a consultation with an experienced tax resolution lawyer, call 877-938-1350 or fill out our online contact form.