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Friday, Jan 27, 2023
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Virtual Taxes

People filling out a Schedule 1 for their taxes this year will notice an additional question at the very top of the form. “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” the question asks. Yes, the Internal Revenue Service wants to know about your transactions involving Bitcoin and other popular virtual currencies. “It appears that the IRS doesn’t think all these cryptocurrency transactions are being reported and that is why they added this question,” said Barry Gilbert, an accountant in Westlake Village. In the Valley region, other accounting firms have CPAs with expertise in cybercurrency. Adam Bullock, head of the Financial Services Industry practice in the Irvine officer at Squar Milner LLP, No. 6 on the Business Journal’s list of largest accounting firms, said that staff has been educating their clients from a tax perspective when it comes to taxes and cryptocurrency. “The IRS is getting smarter about it and we have to protect our clients,” Bullock said. Investors in cryptocurrency range from individuals who have bought or traded the virtual money on one end to professional investment funds at the other end that use cryptocurrency as a hedge against other asset classes, he said. In the middle, Bullock added, are individuals or companies that have larger holdings in virtual currency and make modest transactions. They likely will have already reported their activity on previous tax returns., he said. The most important advice an accountant can give to client holding cryptocurrency is to keep track of the basis, or the price they paid for it, Bullock continued. “Because whether you are a company or individual you are going to have an income tax reporting responsibility,” he added. Evolving regulations Virtual currency, also known as cryptocurrency or digital currency, differs from paper and coin currency in ways other than by lacking a physical object. No central bank controls it and no government backs it. Transactions occur between peers. Creating new bitcoins occurs in a computer network through a complex mathematical process called mining. This process provides privacy and a strong fraud prevention system. Although is has no paper or coin existence, for federal tax purposes the IRS treats virtual currency as property. That places it under general tax principles outlined in certain publications such as on sales and dispositions of assets, taxable and nontaxable income and charitable contributions. As the oldest of the cryptocurrencies, Bitcoin is often used as a generic term when referring to digital money. Bitcoins first became available in 2009 but it wasn’t until a few years later that they grew in popularity. A year ago, Bitcoin was valued at $3,591.02 while as of Feb. 12 it was valued at $10,430.68, according to CoinDesk Inc., a cryptocurrency and blockchain news website and creator of the Bitcoin Price Index. It is an independent subsidiary of Digital Currency Group in New York. Other virtual currencies include Litecoin, Ripple, Ethereum and Ether Classic. Blockchain is the digital ledger that publicly records the transactions of Bitcoin and other cryptocurrencies. The Internal Revenue Service first issued guidance in 2014 on how transactions with virtual currency should be handled when it comes to tax returns. In October, the federal tax agency issued two additional guidance, including one on the tax implications of when new currency is created from an existing one, known as a hard fork. Philip Storrer, a retired accountant and a professor emeritus in accounting at California State University – East Bay in Hayward has a purely academic interest in cryptocurrency. From his perspective, the IRS is more concerned about those who are not reporting their virtual currency transactions and are trying to find lists of those who traffic in cryptocurrency, Storrer said. “They are not really prepared as much as they want to be for criminal prosecutions concerning it, but they are right at the door of that,” he added. “Those are things that they would want to make the public aware of, that they are on the trail of that kind of thing.” Squar Milner’s Bullock said that the fact that a cybercurrency question is on the tax form means that investors will have to state whether they owned any cryptocurrency or did any transactions. “Lying on a tax return is probably the last thing they want to do,” Bullock said. “It can get you thrown in jail if you have enough of it.” – Mark R. Madler

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