If You Held Bitcoins In 2017 Put Your Tax Return On Extension

The IRS has issued a reminder about the reporting requirements for virtual currency transactions. It is a strong reminder.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.

In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.

So if you were fooling with virtual currencies last year and you are getting ready to do your return, pay attention and I'll see if I can help keep you out of prison, which truthfully is a very remote possibility. And I'll explain why I think it is best to file an extension if you had Bitcoins in 2017.

What The IRS Is Talking About?

The IRS concerns itself with virtual currencies that are used for "real world" transactions (Don't worry so much about your World of Warcraft gold). Coinmarketcap.com tracks 1,582 different cryptocurrencies. As of yesterday (3/24/18) evening, they range in market capitalization from Bitcoins which are collectively worth over $151 billion to Dibcoins which are worth just over one thousand dollars (all five million of them). Dibcoin is number 1271 on the list.

The balance apparently do not have a discernible market capitalization. There are over one hundred currencies with market capitalization over $100 million. Bitcoin has a daily transaction volume over $6 billion. There are nineteen currencies with daily transaction volume over $100 million. So there is a lot going on there, a lot of it in just Bitcoin, but by no means all.

As I write this the five top currencies in market capitalization are Bitcoin, Etherium, Ripple, Bitcoin Cash and Litecoin. Meaning no disrespect to its 1,500 plus brother and sister currencies, I will pretty much assume you have been just fooling with Bitcoin. As it happens at least for 2017, that also means you have to consider Bitcoin Cash. Wait till we get to the fork to consider the latter.

What Is Virtual Currency?

I spent some time speaking with Perry Woodin who is the Chief Strategy Officer of HashChain Technology which recently acquired NODE40. The conclusion I reached is that I am not going to try to explain how it is that Bitcoins and other virtual currencies based on the block chain work. So if you want to read about Satoshi Nakamoto, proof-of-work, Byzantine generals and elliptic curves, you can hunt around elsewhere. Here is the explanation on the Bitcoin site that tells us what we need to know:

From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. This is how Bitcoin works for most users.

Behind the scenes, the Bitcoin network is sharing a public ledger called the "block chain". This ledger contains every transaction ever processed, allowing a user's computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called "mining". ... https://www.forbes.com/sites/peterjreilly/2018/03/25/if-you-had-bitcoins-in-2017-put-your-tax-return-on-extension/#1868fd233561