As we head into tax season, the US government has a message for taxpayers—virtual currencies are taxable, and you are legally obligated to report any cryptocurrencies mined, traded, or invested in last year.
"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," the IRS says.
In extreme cases, failing to report virtual currencies when filing taxes could result in criminal prosecution, including tax evasion and filing a false tax return. The former carries a prison sentence of up to five years and up to a $250,000 fine, while the latter is subject to a maximum of three years in prison, along with the same hefty fine.
Cryptocurrency mining is by no means new, but has drawn increased attention lately with Bitcoin and Ethereum skyrocking in value, and numerous alt-coins emerging. PC gamers know all too well the popularity of mining—buying a mid-range or high-end graphics card at MSRP is next to impossible at the moment as mining operations big and small snap up inventories as quickly as they're made available.
It's a bleak situation for anyone wanting to build a gaming PC at the moment. Some have resigned to paying inflated price tags for graphics cards to play games, and then using them to mine cryptocurrencies during the remaining hours of the day to help offset the cost. It's a grind, but if you've gone that route, the IRS wants you to report what you've managed to collect.
"When a taxpayer successfully 'mines' virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income," the IRS states in a related FAQ (PDF).
The bottom line is, cryptocurrencies are not tax-free in the US, so don't forget to include them when you file your taxes.