IRS: Tax implications on digital currencies
In recent years, cryptocurrencies like Bitcoin or Ethereum have seen their popularity grow significantly. Nonetheless, the Internal Revenue Service (IRS) issued a directive on the taxation of cryptocurrencies in 2019 and also began sending out thousands of warning letters to cryptocurrency investors who failed to file their tax returns. ‘taxes.
The IRS knows that “virtual money” can be used to pay for goods or services or be held for investments. A virtual currency is a representation of a value functioning as a medium of exchange, a unit of account, and/or a store of value. In some environments, it acts as a “real” currency- for example, coins and banknotes of the United States – but it is not legal tender in any jurisdiction. A virtual currency that has an equivalent value in real currency, or which can substitute for a real currency, is called “convertible” virtual currency. Bitcoin is an example of a convertible virtual currency, it can be exchanged digitally between users and can be purchased or converted into US dollars, euros, or other real or virtual currencies.
HOW IS A VIRTUAL CURRENCY CONSIDERED FOR FEDERAL TAX?
For federal tax purposes, a virtual currency is considered property – not currency. The general principles of taxation applicable to transactions in goods are applied to exchanges in virtual currency. This means that cryptocurrency should be viewed as having other forms of ownership, such as stocks, gold, or real estate. And, just like trading stocks, you will be required to report capital gains and losses from your cryptocurrency trading in your taxes. Failure to make such a statement will be considered by the IRS to be tax evasion.
HOW TO CALCULATE YOUR CRYPTO-CAPITAL GAINS / LOSSES?
The first step is to determine the cost base of the assets.
In principle, the cost base is the amount invested in the purchase of crypto-assets (this includes the purchase price plus any other costs associated with the purchase of the cryptocurrency). The second step in determining capital gains and losses is to subtract the cost base from the selling price. The sale price is often referred to as fair market value.
The calculation of capital gains and losses can be summarized using the following formula: fair market value – [(purchase price of the cryptocurrency + other costs / number of assets] = gains / losses in capital.
The federal tax rate applied will depend on how long the assets are held: a preferential long-term capital gains rate will be available for assets held for more than one year. It is also important to add that capital gains and losses realized on sales of virtual currency will be taxable in most of the states in which the individual resides.
Form 5471
US citizens and residents who are officers, directors, or shareholders of certain foreign companies, must complete Form 5471, which is a United States Person’s Information Return relating to certain foreign companies.
WHO SHOULD COMPLETE FORM 5471?
In general, all persons from the United States as described in the following situations must complete Form 5471:
- A person from the United States who owns 10% or more of a CEC (“Controlled Foreign Corporation”, that is, a foreign corporation more than 50% owned by owners in the United States).
- A person from the United States who owns 10% or more of a CES (“Specified Foreign Corporation”, whether a CEC or a foreign corporation with domestic shareholders).
- A person from the United States who acquires or holds shares in a foreign company, which shares increase the percentage of ownership above or below 10%.
- A person from the United States who is the officer or director of a foreign company in which more than 10% of the shares of the foreign company changes ownership.
- A person who becomes a US person while owning 10% of a foreign company.
The rule for establishing ownership is more complicated than it seems; the request to complete the form can be initiated by direct, indirect or constructive ownership. It should be noted that a “person of the United States” can refer to an individual, a company, a partnership, an estate or a trust.
WHEN DO YOU HAVE TO COMPLETE THE DECLARATION?
Form 5471 must be completed and returned at the same time as the tax return (including extensions).
WHAT ARE THE PENALTIES IF YOU DON’T COMPLETE YOUR RETURN ON TIME?
Failure to report 5741 will result in a fine of US $ 10,000, with an additional penalty of up to US $ 50,000 for persistent failure to report. These penalties are assessed for each Form 5471 required. Omission of the 5471 return will also result in a reduction in the foreign tax credit.
WHAT IS THE IMPACT OF THE 5741 TAX RETURN?
The Tax Cut and Jobs Act (TCJA) enacted a one-time “transition tax”, also known as the Section 965 shareholder tax. United States of CES. It is a tax on the gains and profits accumulated by foreign companies and which must be paid in 2017 (and potentially in 2018 for open years). The TCJA has also introduced the GILTI tax (“Global Intangible Low Taxed Income tax”) from 2018, through form 8992. The GILTI tax essentially imposes the shareholders of the United States on their earnings from stocks they hold in CESs. Due to the application of GILTI, Declaration 5472
WHAT IS FORM 5472?
The purpose of Form 5472 is to report all transactions between the corporation completing the tax return (“the reporting corporation”) and all related parties, with a Form 5472 for each party. Transactions commonly covered by this form include loans between two companies, management or advisory fees, interest paid, and the purchase or sale of goods. Note that these are transactions from the perspective of the reporting company.
WHO SHOULD COMPLETE FORM 5472?
Form 5472 must be completed by companies owned, directly or indirectly, more than 25% by foreigners.
WHEN SHOULD FORM 5472 BE COMPLETED?
Form 5472 must be submitted along with the corporation’s tax return.
WHAT IS THE FINE INCURRED IN THE EVENT OF OMISSION?
The fine is US $ 25,000 per late form, plus a penalty of US $ 25,000 per additional month late after notification from the IRS. It should be noted that these penalties have sharply increased since 2017.
As these penalties for omitting these declarations continue to grow, more diligence and thoroughness in filling out forms is needed more than ever. A good hearer!
Reference sites:
https://www.investopedia.com/articles/investing/040515/are-there-taxes-bitcoins.asp
http://www.21stcenturytaxation.com/virtual-currency-and-tax.htm
https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies