John McAfee was indicted by the Department of Justice for 10 counts tax evasion this week, which include hiding a yacht and cryptocurrency investments from the IRS. (It seems like there’s always a yacht involved in alleged tax-evasion schemes.)
Best known for founding McAfee, LLC—one of the “big two” antivirus companies in the 90s—he has since become a cryptocurrency promoter whose predictions on Bitcoin haven’t quite panned out. Failed prognostications aside and, obviously, innocent until proven guilty, DOJ says, “McAfee allegedly evaded his tax liability by directing his income to be paid into bank accounts and cryptocurrency exchange accounts in the names of nominees.”
If you’re interested in cryptocurrency investments but don’t want to receive a special letter from the Department of Justice, there are some tips on the Internal Revenue Service’s “Virtual Currencies” webpage.
What is cryptocurrency?
Cryptocurrency is any virtual currency that uses encryption to prevent counterfeiting. The IRS defines virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like ‘real currency’…, but it does not have legal tender status in any jurisdiction.” The agency classifies any virtual currency that “has an equivalent value in real currency … [like] Bitcoin” as “convertible.”
What does the IRS say about cryptocurrency tax liability?
Since cryptocurrency can be used to make purchases and treated as a capital asset, the IRS predictably says that adopters could owe taxes. To help taxpayers stay on the straight and narrow, the agency says that they currently treat virtual currency as property, “and general tax principles applicable to property transactions apply to transactions using virtual currency.” Those who hold virtual currency as a capital asset will also need to record gains and losses.
The IRS has two resources specifically dedicated to virtual currency and several helpful publications:
- Frequently Asked Questions on Virtual Currency Transactions
- IRS Notice 2014-21
- Publication 525, Taxable and Nontaxable Income
- Publication 526, Charitable Contributions
- Publication 544, Sales and Other Dispositions of Assets
- Publication 551, Basis of Assets
- Publication 561, Determining the Value of Donated Property
As a relatively new type of investment, there may be further guidance in years to come. That’s why it’s important for cryptocurrency adopters to stay on top of what the IRS has to say about cryptocurrency. /p>