Documenting virtual currency transactions.

Author:Adams, Edward W.
 
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CPA tax preparers should recognize that the use of bitcoin and other virtual currencies has grown, both as an investment and as a means of commerce, that it has tax consequences, and that it is an IRS target. Consequently, their client tax organizer questionnaire should ask, "Did you 'mine,' buy, sell, or exchange a virtual currency; use a virtual currency to pay for goods or services; or receive a virtual currency as payment for goods or services?" (See also "Tax Practice Corner: Trading Virtual Currencies," JofA, Nov. 2017, tinyurl. com/yazapkkw, with links to earlier articles.) This article addresses various virtual currency issues, including how to document and perform necessary tax calculations for transactions involving a virtual currency.

GROWING CIRCULATION

Notice 2014-21 defines a virtual currency as: a digital representation of value that functions as a medium of exchange, a unit of account, and/ or a store of value. In some environments, it operates like "real" currency--i.e., the coin and paper money of the United States that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance--but it does not have legal tender status in any jurisdiction.

Simply, a virtual currency (also called a cryptocurrency) is accepted as currency by its users. Virtual currencies are offered in "initial coin offerings" and verified and recorded by "miners." They are bought for investment, exchanged for flat or other virtual currencies, and offered and accepted as payment for goods and services. They trade daily on virtual currency exchanges and, as investments, can be volatile and risky but lucrative.

Some retailers and service providers accept bitcoin (BTC), including Expedia.com, Microsoft, Overstock.com, and Dish Network. BTC automatic teller machines exist, and companies issue cards that provide seamless conversion from virtual to "real" currency for retail payments.

IRS ENFORCEMENT ACTIVITY

Most virtual currency transactions are not subject to tax information reporting and probably are underreported by taxpayers. In 2016, the IRS formed a virtual currency investigative team. By examining Form 8949, Sales and Other Dispositions of Capital Assets, the IRS found that only 807, 893, and 802 taxpayers reported BTC transactions in 2013, 2014, and 2015, respectively. The IRS issued a summons for Coinbase Inc., one of the largest virtual currency exchanges with over 500,000 active...

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