The indication is that the IRS is going after digital currency after a summons of Coinbase for information on member accounts. This is as Bitcoin has continued to climb in value and other digital assets like Ethereum and LiteCoin are becoming more commonly accepted methods of payment.
As these digital forms of currency continue to multiply, the IRS response has been slow. And the Service's policy has caused numerous headaches, by treating the digital assets as property rather than currency.
How a new bill would change things?
Currently, any small purchase – buying a latte with bitcoin – becomes a capital gain. How much you owe the IRS on the small transaction depends on a number of factors.
Several legislators have introduced a bill to solve the issue. The “CryptoCurrency Tax Fairness Act” would create a de minimus reporting exemption. This would apply to transactions under $600 and create a reporting requirement more similar to what exists for foreign currencies rather than investments.
Why digital currency is the new big deal
It has to do with the appreciation of Bitcoin as more people start to use it to transact business. The value of the currency fluctuates widely, but has risen from an average around $1,000 to a high of $5,000, which means significant capital gains for those who own Bitcoin.
The current system puts the burden on you to track all your transactions, including the related tax implications. In practicality, few people fully understand the obligation and keep sufficient records. Only 802 people declared Bitcoin-related gains or losses on their 2015 returns, according to the IRS. The IRS has started going after those who have underreported capital gains.
While the legislation is in the early stages, it’s important to get solid tax advice if you own Bitcoin or other digital currency. Do not wait to be audited before addressing the issue.