The IRS is beginning to aggressively pursue taxpayers with virtual currency transactions. Some of you may have received a letter from the IRS with varying degrees of threats regarding tax returns filed that show no virtual currency (bitcoin type) transactions when they have reason to believe that the return should have shown those transactions.
As a result of this attention, many have found that they have significant taxable gains from bitcoin transactions that have never been reported. The literature is full of examples of filers that suddenly owe thousands or tens of thousands of dollars for prior year returns that should have reported these transactions and didn’t. Penalties and interest only make it worse.
Here is one solution that will work for many. Donate some or all of your appreciated virtual currency to a charity. For example, let’s say that you bought $1000 worth of currency a couple of years ago that is now worth $10,000. Since you have held it for more than a year, the gain is taxed as a long-term capital gain. You would pay tax on $9000 if you cashed that coin in. (Gains held for less than one year are taxed at ordinary income tax rates which are less favorable).
That $9000 gain to someone in the 22% tax bracket in CO is likely to produce a tax bill of just under $3000. Ouch.
But what if you donated the currency to a charity. Your contribution deduction would be equal to the fair market value of that currency on the date of the contribution. Using the same numbers as above, if you donated the currency that you paid $1000 for that had a FMV of $9000, you would receive a $9000 deduction on your Federal taxes if you itemized (if you weren’t able to itemize, you would receive a lesser deduction on your CO return).
And yes, you could take some of the gain as cash and gift some of the gain to a charity.
There are reporting requirements that need to be followed to the letter. The charity should provide contemporaneous written acknowledgment of donations that are more than $250. If the donation is more than $5000, the charity should sign the donor’s Form 8283, Non-Cash Charitable Contributions. The signature will confirm the date and receipt of the property. It is still the responsibility of the donor to be able to confirm the value of the contribution in the event of a tax audit (keep your currency account statement).
If you have a big taxable gain, all may not be lost. If you have unreported taxable gains in prior years, we can amend those returns for you and keep you out of trouble. If necessary, we can help set up installment plans with state and Federal agencies.
Need some help in this area, give us a call.
AFS – 303-745-3962