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Capital Gains

The US Internal Revenue Service (IRS) has released a memo reminding citizens that they need to report any cryptocurrency earnings on their income tax returns. Notice 2014-21 defined digital currencies as ‘property’ and are thus subject to federal property taxes.

Those who fail to report earnings from cryptocurrency could face the prospect of an audit and be liable for interest, penalties, or both.

The same goes for citizens of the UK too. Even though HM Revenue and Customs (HMRC) says that there are no plans to update its tax treatment of cryptocurrencies, any profit or gains must be declared.

However, crypto investors may also need to submit post-transaction valuation checks to determine Capital Gains Tax liability too.


Details of Notice 2014-21

In Notice 2014-21, the IRS explained:

“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

This includes the following:

  • A virtual currency payment is subject to information reporting to the same extent as any other payment made in property.
  • Virtual currency payments to service providers and independent contractors are taxable, for which self-employment tax rules generally apply.
  • Wages paid in virtual currency are taxable to the employee and are subject to federal income tax withholding and payroll taxes.
  • Certain third parties settling payments in virtual currency on behalf of merchants accepting virtual currency have to report payments to those merchants.
  • The character of loss or gain from the exchange or sale of virtual currency is based on whether the virtual currency is a capital asset in the taxpayer’s hands.

Taxpayers that do not properly report income tax consequences of virtual currency transactions could even face criminal charges such as filing a false tax return and tax evasion. Both offences carry fines of up to $250,000 and a maximum of five years in prison.


UK citizen responsibilities with HMRC self-assessment

HMRC released a guidance note on cryptocurrencies back in 2014, which stated that UK tax legislation “does not include any special tax rules for income, profits or gains arising from transactions involving cryptocurrencies, or for charges made in connection with cryptocurrencies.”

Although it has not been updated since and the same rules still apply, questions have been raised over how the value cryptocurrencies are taxed at is determined. In the US, the ‘fair market value’ is determined by converting the virtual currency into US dollars at the exchange rate, in a reasonable manner that is consistently applied.

But HMRC told Accountancy: “In most cases it would expect that the value of a transaction involving cryptocurrencies to be clear, for example, where a cryptocurrency is exchanged, at arm’s length, for cash or some other item whose value is ascertainable.

“Where value is an issue for tax purposes and is not clear, HMRC has specialist valuers who are professionally accredited. They can ascribe a market value for the cryptocurrency using generally accepted valuation principles.”

Those who need a post-transaction valuation for capital gains purposes should fill out form CG34 and return it to HMRC.

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