Reporting Virtual Currency Transactions to the IRS

Time May Be Running Out for Affected Taxpayers

Sharon L. McCarthy, JD

IRS Notice 2014-21, issued on March 25, 2014, made it clear that the IRS would treat virtual currencies that can be converted into traditional currency as property for federal income tax purposes (http://bit.ly/2C5pFzq). This means that gain from the sale and exchange of virtual currency is subject to taxation. Given that many are attracted to virtual currency because of its anonymous nature, tax preparers should expect that individual clients might not volunteer information about virtual currency transactions at tax time. Recent events suggest, however, that the IRS is not sitting back and waiting for taxpayers to fully disclose their virtual currency activities. Failure to report such transactions may result in penalties and, potentially, criminal prosecution.