Bitcoin Is On The Move Again
Last month, Visa announced they are partnering with cryptocurrency startup BlockFi to offer a credit card that rewards purchases with Bitcoin rather than airline miles or cash. Earlier in 2020, Coinbase and Visa announced a Coinbase Card, which allowed users to spend Bitcoin using the Visa debit card. If you’re not familiar with cryptocurrency, this would mean that your rewards are more valuable than ever before.
Cryptocurrency was first released in January of 2009 and sold in blocks. These block purchases, receipts, and transactions are recorded as Blockchain. Blockchain is a constantly growing ledger of all Bitcoin transactions that have taken place. These records are chronological, permanent, and public.
In May of 2010, the first Bitcoin retail purchase was conducted. A purchase of two pizzas for $10,000 bitcoin. By 2013, the value of one Bitcoin had surpassed $1,000 and by March of 2017, one Bitcoin surpassed the price of one ounce of gold. As I write this blog, the price of one Bitcoin equals $27,074.90 USD. So, you can see the investment can be very lucrative.
This brings me to my point. Any time there is money to be made, the IRS will be there to collect their portion. In March of 2014, the IRS had issued clear guidance on virtual currencies, explaining that it will tax the digital assets as property, not currency. In November of 2016, the agency filed a John Doe summons to the bitcoin trading platform Coinbase, asking for names and other information of everyone who is trading bitcoin. Then, in the summer of 2018, as the price of bitcoin had climbed above the $8,000 mark, the IRS’s Large Business & International Division launched a compliance campaign into how investors who own bitcoin are filing their taxes. In July of 2019, the agency started sending letters to more than 10,000 bitcoin holders with a warning that they may have violated federal tax laws. They also placed a question in 2019 individual tax returns asking if the taxpayer had traded in virtual currency.
In order to comply with tax law, bitcoin owners must track the value of their bitcoin on the day they purchased/received it, and on the day they sell or transact it and accurately calculate the gain or loss. These calculations can become very complicated, especially given the limited reported provide by the various bitcoin merchants.
Be prepared. Whether you’ve received a letter from the IRS or you do in the future, it’s unsettling. Rest assured, though, that it is just part of the forced education process the IRS is introducing to the cryptocurrency marketplace. The IRS is essentially putting cryptocurrency holders on notice: We know you have this, and you’re probably treating it improperly on your taxes. That’s why it’s so vital that bitcoin owners get their ducks in a row. If you are mining bitcoin, a business receiving payment in bitcoin, or investing in bitcoin, be sure to get all you data to your tax professional and let them help make sure you’re tracking all relevant data. Otherwise, eventually those IRS warning letters will become audits.