By Edward R. Jenkins Jr., CPA, CGMA

You may hear a client – or maybe a coworker or friend – talk about the ups and downs of their Bitcoin and other cryptocurrency investments. From a CPA’s perspective, those seemingly benign comments are a little scary for a couple of reasons:

• Fewer than 900 people a year have been reporting gains and losses on cryptocurrency transactions on their tax returns, even though the IRS has clearly indicated that cryptocurrency transactions are gains and losses to be included in taxable income. The IRS likens cryptocurrency transactions to the sale of stock.
• The use of cryptocurrency has exploded due to a movement of foreign account funds to cryptocurrency accounts and to a massive number of folks who are looking for an opportunity to make money on a relatively new investment. There are roughly 13 million to 28 million "wallets" that hold or trade cryptocurrency out there, and that number is growing rapidly.
• Many people are unaware that quite a few "exchanges" on which cryptocurrency are traded have been organized outside of the United States. Use of a foreign exchange could mean a cryptocurrency investor has a foreign bank account or foreign asset reporting requirement, depending upon the value of their non-U.S. exchange holdings. Failure to properly report foreign bank accounts and assets exposes those investors to potentially very high penalties.
• One of the most important voluntary disclosure and penalty relief programs, the IRS Offshore Voluntary Disclosure Program, or OVDP, is scheduled to terminate in September 2018.

Here’s the bottom line: A lot of people are investing in cryptocurrency, and many of those people are not in compliance with tax law. For those with cryptocurrency holdings in non-U.S. exchanges, that could mean big trouble due to the potential penalties for not reporting foreign bank accounts and assets. Loss of the OVDP is a big problem for those taxpayers who would like to become compliant, avoid a criminal record, and reduce the potential penalties.

Here is a link to my AICPA Tax Insider article. Find out the federal tax implications of cryptocurrency holding before it burns you or one of your clients. 

Edward R. Jenkins Jr., CPA, CGMA, is an instructor of accounting at Pennsylvania State University in University Park, Pa., a tax consultant for Boyer & Ritter LLC in State College, Pa., and a member of the PICPA Federal Taxation Committee and Pennsylvania CPA Journal Editorial Board. He can be reached at erj2@psu.edu.