Cryptocurrencies such as Bitcoin are changing the way that we do business. As an employee or independent contractor, you may even be offered payment in Bitcoin. But how does this impact your tax situation? What can you do to stay in compliance with the Tax Code while being paid in Bitcoin?
Unfortunately, most people who report Bitcoin or other cryptocurrencies as income will be audited. Most of these audits start out mild but have the potential to grow into serious, costly investigations. As a taxpayer, you deserve to know the facts about how you should report your income and what to expect in an audit so you can be prepared.
There is no better preparation strategy for an audit than contacting an experienced California cryptocurrency taxation lawyer like those at NewPoint Law Group, LLP. We can advise you on your unique situation and ensure you are represented if an audit arises. Call us at 800-358-0305 today to set up a legal consultation.
Tax Reporting Rules for Bitcoin as Income
The federal government requires you to make disclosures about your Bitcoin holdings. How you acquire your Bitcoin will matter for these purposes. If you are paid in Bitcoin or some other cryptocurrency, these forms of payment will be taxed as income.
While the government classifies Bitcoin and other cryptocurrencies as “property” for the purposes of taxes, this property will still be considered income. If you contract with an employer to do work in exchange for Bitcoin, you must report the fair market value of the Bitcoin you receive at the time that you receive it. Even if payment comes in the form of property like Bitcoin, it is still income that needs to be reported and taxed.
Reporting your income in Bitcoin will require a reliable and organized recording system for your payments. You will need to keep track of the market value of the Bitcoin you receive on paydays. Because Bitcoin and other cryptocurrencies are subject to frequent value fluctuations, the time that you are paid will also matter.
If you are paid partially in Bitcoin and partially in U.S. dollars or some other asset, you still must follow reporting guidelines. You usually calculate your income by adding the fair market value of the Bitcoin at the time you were paid to the amount of money you were paid to calculate your total wages.
Bitcoin as payment is taxable income whether you are an employee or an independent contractor. The only difference is the form that you will use to report it, which you will already be familiar with. If you need help with your 1099 form as an independent contractor being paid in Bitcoin or your W-2 as an employee being paid in Bitcoin, speak to one of our California cryptocurrency tax attorneys today.
Why You Will Likely Be Audited if You Get Paid in Bitcoin in California
Cryptocurrency exchanges and assets are a highly popular enterprise in the United States, and the government is rushing to catch up. As such, they are increasingly skeptical that taxpayers are following the terms of the Internal Revenue Code (IRC) as it develops to answer questions about Bitcoin assets.
Many people who are paid in Bitcoin attract the attention of the IRS because the government is inherently distrustful of alternative payment schemes. While this may be an entirely honest way to earn a living, government auditors are predisposed to suspect the worst.
Most recently, the IRS has been bolstered with an additional $80 million dollars from the federal budget. This additional funding will go towards improving the technological capabilities of the federal agency and adding personnel to carry out more thorough investigations and audits of suspicious reporting practices. If you make a mistake on your taxes, there is a higher chance in 2021 and beyond that the government will find out and issue an audit.
How to Prepare for an Audit if You Get Paid in Bitcoin in California
Audits are never pleasant. The process can be invasive, tedious, and time-consuming. But not being prepared for an audit only makes matters worse. There are several steps that you can take to position yourself well if you are expecting an audit of your Bitcoin or cryptocurrency income in California.
Keep Detailed Records
Diligent accounting is the most important aspect of escaping an audit quickly and avoiding costly penalties for mistakes. Whenever you get paid in Bitcoin, you should record the exact value according to an established exchange at the time that you receive it. You should also know exactly how much Bitcoin you receive at that time. If you miss recording a payment’s value, you can go back and find out the information later. Still, taking the time to record your payments as they are made can save you the step of having to do research later. If you are concerned about what accounting strategy to use if you get paid in Bitcoin, our California Bitcoin tax audit attorneys can advise you on how best to prepare and maintain your records.
Identify Bitcoin Held as Capital Assets
Each Bitcoin is unique, which allows for Bitcoin acquired in different transactions to be kept as separate assets. If you receive Bitcoin as income while also holding other Bitcoin for investment purposes, you must be able to separate the two assets from each other. Because Bitcoins are property, any profit made from later selling the cryptocurrency is also taxed. If you acquire Bitcoin as income and sell it within a year, the gains will be taxed at your normal income rate. The profit on any crypto held longer than a year will usually be taxed at the lower capital gains tax rate. Being able to identify how long you have held crypto assets is an important part of proving you paid the right tax on the sale or receipt of those assets if you are ever audited.
Speak to a California Bitcoin Tax Audit Attorney
Tax law surrounding Bitcoin and other cryptocurrencies is rapidly developing. Expecting the average taxpayer to stay on top of these developments is unrealistic. At the NewPoint Law Group, LLP, our California tax audit attorneys remain tapped into the IRS’ changing rules on crypto tax enforcement and audit guidelines so that our clients remain protected.
Concerns About Tax Audits on Your Bitcoin Income in California? Get Help Today
The knowledgeable California tax audit lawyers at NewPoint Law Group, LLP are waiting for your call. Set up your first appointment today by calling 800-358-0305.