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Internal Revenue Service

When Do You Pay Taxes on Bitcoin and Other Cryptocurrency?

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pay taxes on bitcoin

Taxation of bitcoin and other cryptocurrencies is pretty similar to the way you pay taxes on any other type of investment. And regulators are slowly but surely making it harder and harder to evade this type of tax.

You pay capital gains taxes when you sell a cryptocurrency like Bitcoin, whether you harvest into dollars or any other currency.

If you had held the cryptocurrency for less than a year, the sale is taxable as income tax; hold it for more than a year before selling it, and you pay the capital gains tax rate, which is lower.

How to Pay Taxes on Bitcoin

The only thing related to cryptocurrency that you need to report to the Internal Revenue Service concerns sales of cryptocurrency into any other currency you get to declare a loss or gain.

(If you own any cryptocurrency funds and they paid dividends, you’d have to pay taxes on those dividends but it’s highly unlikely that a crypto fund would  be paying dividends anytime soon.)

You report this activity in Schedule D of your tax return. Input the difference between what you paid for the currency and what you sold it for. If you made money, it’s a capital gain. If you lost money, it’s a capital loss.

The IRS Always Knows

Like it or not, the IRS will eventually get wind of your crypto trading profits, as it is now privy to information from any U.S. exchange you might have transacted on; the agency essentially won the right to this data in court in November.

Spare yourself the interest and penalties you might end up owing from attempting to not report capital gains on cryptocurrencies. The IRS typically takes at least six months to catch up on nonpayments, so you’ll end up owing extra money as interest or penalties.

And even if you did a cryptocurrency transaction on a site that is not based in the U.S., and move the funds into a currency other than the dollar, these sites aren’t immune to the tax treaties that the IRS has already been brokering with foreign countries.

It might take longer for the IRS to obtain information on activities on foreign sites, but eventually, the prevailing trend in the IRS’ fact-finding will play out here as well.

Although cryptocurrencies’ origins included a lack of real taxation on them — and policies to support that — slowly but surely regulators around the world are making it harder for people to dodge this type of tax.

For more information on how the IRS handles cryptocurrencies, click here.

Readers, are you still confused about whether there are taxes on bitcoin or other cryptocurrencies?

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Missed the Tax Deadline? Avoid Higher IRS Penalties — File by June 14

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IRS penalty deadline

Once you miss a tax filing deadline, it’s all too easy to make the additional mistake of continuing to procrastinate. Well, here’s a good reason not to do that: a higher rate for IRS penalties kicks in for those that haven’t filed by the end of the day on Thursday, June 14.

After that date, things get complicated: The minimum penalty becomes either $210 or 100 percent of the unpaid tax amount, whichever amount is less.

Up until this point the penalty amounts to 5 percent for each month — or even partial month — a tax return is late and the taxpayer hasn’t requested an extension.

Payment Due

Once a return is filed, the IRS calculates the penalty and interest due and sends you a bill — payment is usually due within 21 days.

If you pay what you owe when you file, you avoid additional late payment penalty and interest charges. The penalty portion of that is 0.5 percent of the unpaid tax — imposed for every month (or part of a month) that the payment is late. The interest amounts to 5 percent annually, and it compounds daily.

Should your reason for not filing have anything to do with an inability to pay, you’re better off requesting an installment plan or suggesting a compromise amount.

Can You Get IRS Penalties Waived?

It’s also possible to apply for an abatement of any penalty assessment, but to qualify for that you need to have paid on time for the last three years in a row. It’s also possible to have the penalties reduced if you can prove your lateness wasn’t due to willful neglect.

There are other circumstances in which you might be able to file or pay late — including taxpayers living outside the U.S. and those living in declared disaster areas.

Penalty Won’t Apply

The penalty won’t apply to what the IRS estimates to be 14 million taxpayers who requested extensions — they have until October 15 to either file or request another extension, which would push out the final deadline to December 15.

However, that doesn’t mean that the possibility of penalties doesn’t exist for people who file for extensions and then miss the extended deadlines. The increased penalties kick in 60 days after the agreed-upon deadline.

To clarify: The penalty also doesn’t apply to people who need to claim refunds, but the IRS feels compelled to remind taxpayers that they have to claim that refund within three years of the original filing date or forfeit that refund (Wouldn’t the prospect of a refund be enough to motivate people to file on time?).

For what it’s worth, 135 million taxpayers filled on time, by April 18 this year. Over 90 percent of them filed electronically.

Finally, if you do end up going having to deal with late filing penalties, the lesson to learn from this might be to ratchet up your tax withholding so that you don’t have to end up owing money later on.

Readers, have you ever missed the tax filing deadline without requesting an extension — and if so, what happened in the aftermath?

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Will the New Tax Law Reduce the Likelihood You’ll Be Audited?

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New Tax Laws Should Lower Your Audit Odds What You Need to Know About Getting Audited Today
The recent Tax Cuts and Jobs Act (TCJA) represents one of the biggest changes to the tax code in many years. Will the Internal Revenue Service be up to the challenge of enforcing these changes?

For the last five years, the IRS has been examining fewer and fewer returns. In calendar year 2016, 1.1 million tax returns were audited (0.5 percent of all returns), down from approximately 1.7 million returns in calendar year 2012.

Now the IRS faces a new regulatory challenge with approximately the same budget as in 2017 – a decrease of almost $1.5 billion (23 percent) from 2010 when inflation is taken into account.

Will Your Odds of Being Audited Really Drop?

It seems reasonable that your odds of being audited will drop even further with the passage of TCJA. However, that may depend on how you are affected by the new law.

The TCJA was designed to simplify taxes through encouraging fewer taxpayers to itemize.

With the standard deduction almost doubled, fewer Americans are likely to itemize – and excessive or unusual itemized deductions are one of the most common methods of cheating on taxes.

Fewer Red Flags

Simply put, your tax return is less likely to raise a red flag with the standard deduction. Fewer opportunities to cheat equals fewer reasons to audit.

However, you can still claim credits without itemizing, and credits targeting lower-income filers are popular targets of thieves.

The Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) earn extra scrutiny – so much so that the IRS is required by current law to hold refunds back until mid-February for any taxpayer claiming either credit. The TJCA does not affect these credits.

Under-Reporting Income

Another popular source of tax cheating, and consequently a red flag for audits, is under-reporting of income.

For most individual taxpayers, that’s difficult to do since third parties report most income to the IRS.

Traditional employers submit W-2 forms, and 1099 forms cover independent contractors, investment income, and many other income sources.

When your W-2s and 1099 forms don’t match your stated income, you’re at higher risk for an audit regardless of the TCJA.

Pass-Through Income

The TCJA does open one potential source of fraud or confusion. Prior to TJCA, income from sole proprietorships, partnerships, and LLCs that passed through to owner’s individual taxes were taxed at ordinary rates corresponding to the filer’s ordinary tax bracket – up to a 39.6 percent maximum.

The TJCA provides a 20 percent deduction on pass-through income considered to be qualified business income (QBI), creating incentive for taxpayers to run more income through these structures.

The rules and limitations on the QBI deduction are complex and difficult to understand.

It’s likely that well-meaning business owners will run afoul of the rules because their application is unclear.

It’s also likely that other business owners will stretch definitions to take advantage of the new law – and, in some cases, charge past the intended boundaries of the new law.

Either way, an audit is more likely because there’s greater opportunity for error (and usually more money involved compared to the average taxpayer).

Don’t Cheat

The TJCA may lower your risk of an audit, and theoretically could give you a greater opportunity to cheat on your taxes – but we strongly discourage tax fraud.

Most Americans consider it wrong to cheat on taxes at all (88 percent, according to the IRS’ Comprehensive Taxpayer Attitude Survey).

And even if you are one of the 3 percent who actually told the authors of the IRS survey that it was acceptable to cheat on forms as much as possible (a strangely honest response for a potential audit target), we suggest that you resist the urge.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/AndreyPopov

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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What To Do If You Are Audited

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You’ve received a letter from the IRS regarding an audit. What is your plan? Assuming the fetal position? Heavy drinking? Fleeing the country? Spontaneous combustion? None of these actions is necessary. Simply stay calm and assess the situation objectively.

“Anybody of any income level can potentially get audited,” says Betterment Head of Tax Eric Bronnenkant. He advises that “people prepare their taxes honestly and truthfully, and also be able to support what they put on their return in the event they get audited.”

The letter you receive may be one of three types.

1. Adjustment Letter

This notifies you of a change in your taxes owed, or the refund amount. In this case, it is generally from an obvious wrong number entry or miscalculation on your form. The Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018 brought about many changes, so it is to be expected that more taxpayers will make these types of errors until they are familiar with the new tax code.

2. Correspondence Audit

This letter asks for further information to verify your tax return; such as a W-2 form that does not match the amount reported by your employer. The letter will tell you exactly what information is needed and how to respond. It is possible that your entire audit can be dealt with via correspondence. This is the most common form of audit.

3. Examination Audit

This in-person audit is what most people envision… and fear. The letter will let you know the nature of the audit, what information is needed, and how to schedule an in-person appointment. The appointment may take place in your home, place of business, or at an IRS office. You generally have ten days to schedule an appointment.

There is a comprehensive list of notices and letters at the IRS website, along with links for further explanation. All letters and notices will contain the reason for the letter, its purpose, and how to respond.

Once you have read your letter and understand the issue, what’s next?

1. Don’t Ignore the Issue

Ignoring the problem will not make it go away. The issue may be simple, such as acknowledging a math error, and may only require sending a check. In any case, you have a set amount of time to reply. This varies depending on the type of notice, but it is typically 30 or 60 days. If you have to pay interest, the more you delay, the more you will have to pay.

2. Do you Need Representation?

You probably need representation by a CPA or attorney if you disagree with the IRS findings, cannot find the documentation the IRS requested, or have a more complex tax issue.You are still responsible for your return even if you had a third party prepare it for you. Take advantage of whatever audit defense is included with your contract. Professional tax preparation does not guarantee freedom from an audit.

3. Audit Preparation

Gather all the information requested and have it organized. Make sure you have the correct year – IRS audits can involve returns from up to three years prior, and two years is not uncommon. It is wise to keep records for up to six years.

4. The Audit

Bring all the requested information with you. Answer the auditor’s questions to the best of your ability. Do not bring extra information or discuss other issues – stick to the focus of the audit. You may have your representative with you during the audit, and you may make an audio recording if you provide advance notice.

5. The Conclusion

The auditor will either agree with you and resolve the matter, or rule against you and require you to pay some additional taxes. You may be liable for penalties and interest charges as well. You can choose to pay or fight in court if you think your chances of success are good and the amount at stake is much greater than the legal fees. The IRS also allows you to file an appeal and provides mediation if you disagree with the outcome of the audit.

The good news is, if you filed your return honestly – and maintained thorough documentation and proof of your deductions – any additional taxes due are likely to be manageable. Consequently, keep your records in order, follow the IRS instructions, and get representation as needed. Your audit experience should be less painful than you fear it will be. And if you do assume the fetal position, snap out of it long enough to take care of business.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/eric1513

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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IRS.gov Buggy Amid Last Minute E-Filing Traffic

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last minute e-filing

Don’t say we didn’t warn you (yesterday). The IRS website is reportedly crashing from last-minute e-filing traffic.

As predicted, the online version of a traffic jam at the worst possible time came true.

In fact, by April 6, traffic to the Internal Revenue Service website was already 23.9% higher than it was last year,as both taxpayers and preparers have had to research the agency’s interpretation of the Tax Cuts and Jobs Act.

However, about a quarter of American taxpayers still hadn’t filed their returns before the start of the weekend.

Last-Minute E-Filing Is Actually Pretty Common

Although this proportion is consistent with what it was at the same time last year, it’s unclear whether the agency’s website might nonetheless see more of a last-minute traffic spike in the final hours leading up to 11:59 pm on Tuesday April 17, when taxes are due.

Most likely, the agency likely planned for a surge in traffic during this time, but still, it’s not unreasonable to expect slower performance on the IRS website during the hours closest to the deadline.

The increase in traffic to the IRS website is actually the most noticeable difference between this year’s filing season and 2017 — based on comparing cumulative statistics as of the same date a year ago and today.

Individual Income Tax Returns

2017

2018

% Change
Total Returns Received 103,612,000 103,762,000 0.1
Total Returns Processed 101,028,000 101,082,000 0.1

E-Filing Receipts
TOTAL 95,458,000 95,899,000 0.5
Tax Professionals 54,720,000 54,283.000 -0.8
Self-Prepared 40,738,000 41,616,000 2.2

Web Usage
Visits to IRS.gov 276,082,236 342,057,461 23.9

Total Refunds
Number 80,296,000 79,100,000 -1.5
Amount $228.951 billion $226.558 billion -1.0
Average Refund $2,851 $2,864 0.5

Direct Deposit Refunds
Number 69,293,000 68,220,000 -1.5
Total Amount Refunded $208.475 billion $205.555 billion -1.4
Average Refund Per Taxpayer $3,009 $3,013 0.1

Readers, have you filed your income tax return yet or were you planning to do it at the last minute?

Read More About the IRS

Don’t miss a single one of our stories about this year’s tax filing season — here’s a list of stories from our archives:

What’s the Best Way To Settle Your IRS Tax Bill?

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Settle Your IRS Tax Bill
It’s official: The last day to settle your federal tax debt without incurring penalties. Do you have an IRS tax bill?

Finding out that you owe the IRS additional money can be disheartening, but it’s something that you have to handle.

Luckily, there are a number of ways you can settle your IRS tax debt. In most cases, the process is easy. Plus, you can use a variety of payment methods to get the job done.

If you owe the IRS additional taxes, here’s what you can do.

Settle Your IRS Tax Bill with Direct Pay

One of the fastest, most secure, and least expensive options is to use Direct Pay. First, you’ll need to sign up for an account to access the system. Then you can make a payment using your bank account.

The Direct Pay system walks you through the process, and there are only a few steps. Typically, you’ll need to select the tax year, verify your identity, and enter the payment amount.

You can elect to receive an email confirmation of the transaction (which is wise), so you’ll have a record as you settle your IRS tax debt.

Use a Credit or Debit Card

If you prefer to use a credit or debit card to settle your tax debt, you have a few options. There are multiple payment processors you can use, so you’ll need to choose the right one for you.

The process is typically quick, although it varies slightly from one processor to the next. It is important to note that there is a fee for paying with a card, unlike when you use Direct Pay.

Usually, debit cards have flat fees. Credit card fees are typically a percentage of the amount you’re paying to settle your IRS tax debt. This means that the credit card fees can be high, depending on how much you owe.

Some processors also accept payments through digital wallets, so that option is available as well.

Set Up a Payment Plan with the IRS

If you can’t settle your IRS tax debt now, then consider setting up a payment plan. Qualifying taxpayers can pay what they owe over a period of up to three years, allowing them to spread out the burden.

Not everyone qualifies for a payment plan. For a long-term repayment plan or installment agreement, you can’t owe more than $50,000. For a short-term plan, you must owe $100,000 or less.

There are set-up fees for some payment plans, although the fees are typically low. However, in some cases there’s interest on top of that. You can apply online and may have to set up direct debits depending on how much you owe.

Even though tax day is here, there is still time to settle your IRS tax debt if you use one of the methods above. Alternatives like mailing a paper check, might not make it to the IRS in time and could lead to penalties and interest.

Have you ever used one of the methods above? Share your experience in the comments section below.

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Learn more about taxes by checking out more of our coverage of this year’s filing season: