With the big question first:
Q-1: How is virtual currency treated for federal tax purposes?
A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
https://www.coindesk.com/internal-revenue-service-treat-digi...
Speculation -- how can any conclusion about whether a tax violation occurred, if the IRS doesn't even have the information about the people who even sold bitcoins? This effort is the start of that determination.
In Canada there is a form called a T1135, i was filling mine out today :) This form asks for a few key things related to any securities you hold in foreign countries: 1) Max Fair Market Value, Current Fair Market Value, Grioss Income (I.e. rents extracted before expenses), Gain (loss) of any depositions.
Which country do I hold my asset in if I purchase bitcoins? Are they Canadian or foreign? Does it depend where they are kept? It doesn't in the case of stocks, even those on the NYSE but for Canadian corps do not fall under this reporting requirement, and inversely those on the TSX for US companies do fall under this requirement! So what nationality are bitcoins and all other crypto for that instance?
You need to fill this out if you have > $100,000 CAD worth of foreign assets, once for each country you hold assets in (regardless of purchase price, we're talking max fair market value).
The fee for not filing this form is a flat $2,500 + interest of any taxes owed.
The question this raises for me, if someone bought $1000 worth of bitcoin in 2012 and retained them until today, they easily have over this limit. I am sure there are a fair few people that will get messed up here. I'd love for governments to provide clearer guidance here to prevent upsets later.
Also, T1135's are almost impossible to file correctly. Seriously, they're a stupid form. IMO the CRA should just ask for a report of all your trades and the relevant countries (assuming we can answer the country question, i suppose?) and leave it there - and they do in the form of a T5008 or you can report it under the Capital Gain / Loss section (I think it's called Schedule 3).
I guess what I'm saying is this: It's effing hard to report correctly, even when you try. In my life, I've spent more on tax lawyers than I have on cars. I feel like I do everything I can, I feel like I've been good...but i sometimes get kept up late at night worried I messed up and no one will believe it was an honest mistake.
If you bought coin and are still holding it, you don't owe any tax (you aren't taxed until you convert it into dollars). When you sell it, then the gain is the difference between what you paid for it and what you sold it for (less any transaction fees).
Its fairly straight forward.
That said, if you have a gain from buying something and reselling it but that sale is never reported to the IRS for any other reason (in my case the bank holding my IRA reports the gains to the IRS anyway), then there might be the temptation to just "forget" about it. That probably seems harmless except that something can happen (like the person who bought your coin mentions they bought it from you) and if the IRS finds you knew something and didn't report it, they come back to you and take what they are owed.
I know there are lots of tax helper programs out there but I thought like 95% of people have someone else do taxes or use some forms of automated tool to assist them. I'd hope all these tools ask the question and prompt a direction
The first is to put whole dollar amounts on all the lines on all the forms, and to round those as you say. Even that one doesn't round all intermediate numbers used in calculations, only the lines on the form.
The other is to be precise to the penny.
Both are allowed by the official instructions, even if software like TurboTax Online always picks the first.
However, if you do things by hand there is some ambiguity whenever you have a choice to bundle or unbundle accounts, because if you enter them separately, you've rounded before the sum, but if you enter one total, you are supposed to round after the sum. You can save a buck here and there if you want.
One example of how preliminary numbers (a better phrase than intermediate) aren't rounded would be if someone has three Forms W-2 in a year, such as from three jobs. All three Box 1 amounts are added up unrounded regardless of whether you put a whole dollar wage total on Form 1040. If the three Box 1 amounts end in 35 cents, 40 cents, and 45 cents (just to pick a suitable example), you're going to show an extra buck of wage income than if you could round those cents away.
IRS guidance from the 1040 instructions:
"You can round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.
If you have to add two or more amounts to figure the amount to enter on a line, include cents when adding the amounts and round off only the total."
I that because the landlord filed a form but the tenant didn't file a form to match?
Small mistakes may never trigger an audit, but audits can be random as well. If you’re audited they will find these mistakes. It’s much easier to claim negligence for small amounts than gross omissions. There probably isn’t a steadfast rule for when something would be considered fraud.
My advice, don’t knowingly omit things, even small amounts. I wouldn’t sweat if you accidentally missed a few bucks in the past. If it’s any significant amount I’d file an amendment. I believe you aren’t liable for penalties if you unknowingly made a mistake and amend a return.