Sins of the Past: Are You Guilty of Withholding Bitcoin from the IRS?


For a long time, Bitcoin may have seemed like it existed in the underbelly of currency.

To the average person, the idea of digital currency without any physical format is intimidating, but Bitcoin has continued to thrive and become one of the most valuable forms of cryptocurrency in the world.


What is Bitcoin?

Started 10 years ago, Bitcoin is a decentralized, digital cryptocurrency that exists without a central bank or administrator.

Sent from user to user on the peer-to-peer Bitcoin network, the currency requires no intermediaries. There is no physical form of Bitcoin and those that you do see are for novelty purposes only. Without their private codes, they are worthless.

Every Bitcoin is a computer file stored in a digital ‘wallet’ that you could send to other people. Every transaction that happens is recorded in the blockchain to keep track of the amount of currency currently in trade and where it’s located.


The IRS and Bitcoin

Many people have profited off of cryptocurrency investments. While real-world authorities may struggle to regulate the anonymous Bitcoin market, that does not mean tax authorities aren’t scrutinizing these lucrative investments.

Anyone who made major monetary gains from trading, buying, and investing Bitcoin will now have to consider the IRS’ interest in a portion of these proceeds.

In 2016, Coinbase—one of the world’s largest cryptocurrency exchanges—was ordered by the IRS to provide information on 14,000 customers that were involved in buying, selling, and profiting off Bitcoin.

This means that the IRS is tightening its grip on people who are making money off Crypto profits and underreporting it—and most people are underreporting it.

In fact, Credit Karma reported that: “fewer than 100 people have reported gains from cryptocurrency investments out of the 250,000 Americans who have already filed their federal tax returns this year.


What to do if you have to report Bitcoins?

The rules surrounding cryptocurrency taxation are still being formed. However, there are rules in play. If you’ve been holding cryptocurrency for less than a year, it will be taxed as ordinary income. However, if you’ve been holding onto that Bitcoin for more than a year, then it will be taxed as capital gains.

If you are still holding your Bitcoin, in that you haven’t sold or transferred them after receiving them, then there’s no tax liability. You’re only taxed on your Bitcoin after a sale or transfer that could lead to potential profits or losses.

If you mine for Bitcoin (that is use computers calculating incredible sums to generate Bitcoin) you will be taxed as self-employed and are expected to report your Bitcoin at equal market value.

If that all seems deeply confusing, you’re not alone in that thought. Many people underreport Bitcoin or try to hide them. Sometimes this is because they don’t want to pay the taxes, but often it’s because they don’t know how to pay the taxes on Bitcoin.

Finding a tax attorney familiar with the laws surrounding cryptocurrency is key here. These tax attorneys will help you unravel your taxes and help you understand how to report Bitcoin so that you aren’t penalized in the future.

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