What should you do if all of your Bitcoin profits are not reported on your US tax return? You have to have at least given it some thought by now. How would the Internal Revenue Service know? This is a question I get from customers as least as often as I read it in print. According to the Internal Revenue Service, the chances of being chosen for an IRS audit were about one in every 100 taxpayers that year. This year, with more duties (management of conformance with the Affordable Healthcare Act) and reduced funds, the chances of avoiding an audit are even greater. However, choose to understate your income and be discovered. The outcome may have serious repercussions for you and a negative impact on the future of Bitcoin regulation as a whole and before we get to the example, make sure to register and see review yourself on the BitiQ and learn all the different ways to earn in the digital currency.
For example, “just because a company that paid you does not report that payment in one year does not mean that the IRS would expect you to have reported what you received a year later when the firm is audited and produces late 1099 forms,” Hauer said. The Internal Revenue Service has placed cryptocurrency at the forefront of this year’s tax-filing season. Ask a yes-or-no question on the first page of your tax return, at the top of the page. In other words, no matter how it got into your hands, you are required to report it to the Internal Revenue Service.
While the price of bitcoin has fallen this week, dropping to around $48,000 on Tuesday after peaking at approximately $58,000 on Sunday, its upward trend over the last year suggests that investors have made capital gains that should be reported to the IRS. One coin was valued at about $29,000 by the end of 2020, after beginning the year with a value of approximately $7,300. Of course, if you possessed bitcoin last year but did not participate in any connected transactions with it (i.e., you just kept it), you did not have a taxable event on your hands. Despite this, you would respond affirmatively to the tax-form question.
The IRS will next require you to provide documentation to support all things on your tax return for each year being scrutinized. Because taxpayers do not intentionally underreport taxable income, the focus will be on demonstrating that you declared all of your income (that there is no more than you reported) and that you were entitled to the deductions and credits that you claimed. It is at this point that your Bitcoin activity is most likely to be detected by authorities.
There are many more. These methods do not need a high level of expertise or forensic analysis. In deciding what kind and how much evidence to seek in conjunction with an audit, auditors have a great deal of discretion. Does it occur to you to share information about Bitcoin on social media sites? Do you go to Bitcoin-related events? These are not reasons to be concerned about an audit in and of themselves, but they may be reasons why an auditor would scrutinize your revenue more closely than she would otherwise.
Impact This Have on The Future of Bitcoin’s Regulatory Framework
As of now, it seems that the United States government is adopting a “wait and see” attitude toward Bitcoin. At worst, the authorities believe that Bitcoin isn’t worth their time at the moment. In the absence of widespread compliance, more stringent regulatory action will almost certainly be taken sooner and with more severity than would otherwise be necessary. At the very least, Bitcoiners may anticipate that registered exchanges will soon be obliged to monitor and disclose transaction information in the same manner that securities brokerages are required to do. If the regulatory future is less convenient, it might include the requirement to report one’s entire digital currency portfolio to the IRS each year as part of one’s tax return (similar to the Foreign Bank Account Report or FBAR for Bitcoin), or the registration of all Bitcoin startups, rather than just the exchanges.
Self-reporting by people and companies is the foundation of the United States’ income tax system, which is supported by an aggressive enforcement regime. Consequently, the Internal Revenue Code is riddled with instances of increased reporting requirements that have arisen as a result of taxpayers’ underreporting of their income. The conduct of Bitcoin’s users will have a significant impact on whether or not Bitcoin will become a member of that group.