The Internal Revenue Service, in a release issued on March 23, reminded U.S. taxpayers to include cryptocurrency earnings on their annual income tax filings.
The IRS first outlined its standards and practices regarding the taxation of cryptocurrencies in 2014, rendering them subject to taxation akin to other forms of property. Friday's release reiterated the IRS' stated position from that previous outline. "A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property," the release said. Profits earned via cryptocurrency are subject to capital gains taxation, while wages served in cryptocurrencies are also subject to taxation.
Failure to report or misrepresent crypto earnings can leave taxpayers open to the standard forms of enforcement deployed by the IRS, including auditing, fines and criminal prosecution in the most egregious of cases.
“In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions," the release read, before laying out possible charges such as tax evasion and filing a false tax return. Conviction for tax evasion carries penalties of incarceration for up to five years and a fine of up to $250,000. Conviction for filing a false tax return carries penalties of up to three years incarceration and a fine of up to $250,000.
Drawing attention to the "inherently pseudo-anonymous aspect" of cryptocurrency transactions, the release dissuades taxpayers from being tempted to allow those aspects to influence their tax filings.
With the recent proliferation of cryptocurrencies in the worldwide financial market, and its growing use as a means of transaction, this step by the IRS seems not only obvious but reasonable. As cryptocurrencies begin to gain widespread viability as a method of payment and conducting business, the issue of their taxability, at least in the United States, seems to be a settled matter. In fact, that cryptocurrencies have enough purchasing power to be legally considered taxable by the revenue service of the world's largest economy can be viewed as a victory for the long-term viability of cryptocurrencies as a whole.
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