# Understanding Bitcoin and Taxes: A Beginner’s Guide
Are you one of the many individuals who have invested in digital or virtual currency such as Bitcoin? If so, you need to understand the implications of the IRS guidelines and the tax laws regarding these transactions. In this beginner’s guide, we’ll explain everything you need to know to manage your tax obligations related to cryptocurrency.
## Keep Accurate Records
Just like with any other property transaction, record-keeping is essential when it comes to virtual currency. The IRS has made it clear that cryptocurrency, such as Bitcoin, is viewed as property for U.S. Federal tax purposes, and the general rules applicable to any property transaction also apply to virtual currency. That means that the IRS expects every transaction to be reported. Failure to do so could lead to significant penalties and interest.
## Virtual Currency is Taxable by Law
If you’re engaging in cryptocurrency activities, you must have a clear understanding of the specific details regarding your tax reporting obligations. The IRS has issued a notice, [Notice 2014-21](https://www.irs.gov/pub/irs-drop/n-14-21.pdf), that provides guidance to taxpayers on digital currency transactions.
Here are some points to keep in mind:
– A payment made with virtual currency is subject to the same tax reporting as any other payment made in property.
– Payments made to independent contractors, and other service providers with virtual currency are taxable, and self-employment income tax rules generally apply. Normally, this means issuing a 1099-MISC.
– Wages paid to employees using virtual currency are taxable. The compensation is subject to federal income tax withholding and payroll taxes and must be reported on a W-2 form.
– Third parties that settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers must report payments to these merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
– Although cryptocurrency is subject to capital gains tax, the tax implications vary, largely based on how the property is treated “in the hands of the taxpayer.” You’ll need to consider short-term and long-term capital gains and losses and whether you’re writing off gains against losses correctly.
– Income tax withholding and payroll taxes must be paid in U.S. dollars.
## Not Reporting is Risky
Failing to report cryptocurrency-related transactions could lead to an audit and significant penalties and interest. In more severe cases, taxpayers could face criminal prosecution for failing to report transactions accurately. For example, anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. If you’re convicted of filing a false return, you could face a prison term of up to three years and a fine of up to $250,000.
The bottom line: The IRS treats cryptocurrency as property for tax purposes, so selling, spending, and even exchanging it have implications related to capital gains. Similarly, cryptocurrency functions as ordinary income when used as compensation for employees or contractors.
## Stay on the Right Side of Mandatory Reporting
When it’s time to handle tax reporting for your business, you can print, mail, and electronically file 1099, W-2, and ACA forms with efile4Biz.com. As an IRS-authorized e-file provider, efile4Biz.com is an industry pioneer in online processing. You can handle your annual tax reporting with ease and confidence, using this essential resource.
In conclusion, Bitcoin and other virtual currencies have become increasingly popular nowadays, and it’s essential to understand the tax regulations and obligations related to them. Each transaction must be reported accurately, and failure to do so could lead to significant penalties and interest or even criminal prosecution. It’s important to educate yourself on the specific tax reporting requirements and to maintain accurate records. With the right tools and resources, you can keep up with the ever-changing landscape of cryptocurrency taxation and avoid costly mistakes.