What You Need To Know If Buying And Selling Crypto Currencies
It is getting easier for people to buy or acquire crypto currency because more and more exchanges are being created and different methods of purchase (besides cash and money orders) are now available using credit and debit cards, Paypal, and barter arrangements.
Storing Your Crypto Currency – The Non-Custodial Wallet
After choosing a crypto currency to acquire, you should get a noncustodial wallet so you can store the crypto currency in a safe place. Keep in mind that your wallet must be compatible with the crypto currency that is going into it – for example, an ETH wallet will not work with BCH and vice versa. If you do not have a wallet, your crypto currency will be left on an exchange which leaves your crypto currency vulnerable to the risk of theft.
Methods Of Acquiring Crypto Currency
After obtaining a wallet which can be accessed from your mobile phone or desktop, you then can proceed to purchase crypto currency. The three primary ways are:
- An exchange,
- A crypto currency ATM, or
- A peer-to-peer service.
Exchanges are trading platforms that let you buy and sell cryptocurrencies for other digital assets or fiat. An exchange is a quick way to obtain crypto currency but because you will need an on-line means of payment, you will not be able to use cash. Trading platforms allow you to pay using a credit card, Paypal or bank wire. Keep in mind that you will first need to verify your identity and validate a payment system with the exchange before you can start purchasing.
Crypto Currency Automated Teller Machine (ATM)
There are more than 4,000 digital asset dispensing devices all over the world. In order to locate a machine in your local area, check out Coinatmradar.com. Expect to pay a transaction fee of 6 to10 percent per transaction.
The last method for acquiring cryptocurrency is in a peer-to-peer fashion. In other words, you can buy coins from a friend who already has digital currencies or you can opt to use a service that will act as an intermediary for the transaction. Services available include: Openbazaar.org, Localbitcoincash.org, Bitquick, Paxful, or Localbitcoins.com. These services allow anyone to buy from a person selling coins either in person or online by using an escrow system to keep the trades fair.
Taxation of Crypto Currency.
While buying a digital currency is straightforward, the tax rules that apply can get pretty tricky. Notice 2014-21 provides these tax rules:
- Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
- Exchanging one token for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
- Receiving payments in crypto in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
- Spending crypto is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $500. If that coin was then worth $700 and you bought a $700 gift card, there is a $200 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
- Converting a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
- Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain.
- Mining coins is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
- Initial coin offerings do not fall under the IRS’s tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.
Penalties For Filing A False Income Tax Return Or Under-reporting Income.
Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.
Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).
The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).
And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.
Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!
Voluntary Disclosure – The Way To Avoid Criminal Fines & Punishment
The IRS has not yet announced a specific tax amnesty for people who failed to report their gains and income from Bitcoin and other virtual currencies but under the existing Voluntary Disclosure Program, non-compliant taxpayers can come forward to avoid criminal prosecution and negotiate lower penalties.
What Should You Do?
With only several hundred people reporting their crypto gains each year since bitcoin’s launch, the IRS suspects that many crypto users have been evading taxes by not reporting crypto transactions on their tax returns. Don’t delay because once the IRS has targeted you for investigation – even if it is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability. Also, if you are involved in cannabis, check out how our cannabis tax attorneys can help you.