U. S. taxpayers are required to report income from virtual currency transactions, the Internal Revenue Service has advised taxpayers in a notice. The agency has provided guidance on virtual currency in IRS Notice 2014-21 for taxpayers and tax preparers. Just like transactions in any other property, virtual currency transactions are taxable. Those who fail to report the income tax consequences of such transactions can be audited and possibly liable for interest and penalties, the IRS noted. Criminal Prosecution PossibleTaxpayers can also be subject to criminal prosecution in extreme situations for not properly reporting the income tax consequences of virtual currency transactions. Criminal charges include filing a false tax return and tax evasion. Persons convicted of tax evasion are subject to a fine of up to $250,000 and a prison term of up to five years. Those convicted of filing a false tax return are subject to a fine of up to $250,000 and a prison term of up to three years. Virtual currency is generally defined as a digital representation of value functioning in generally the same manner as a nation’s traditional currency. Since virtual currency transactions can be hard to trace and have an inherently “pseudo-anonymous” aspect, taxpayers can be tempted to hide taxable income from the IRS, the notice stated. Also read: Trump’s new economic adviser hints at friendly tax policy for crypto investorsProperty Tax ImplicationsVirtual currency is treated as property for federal tax purposes, according to Notice 2014-21. General tax principles apply to property transactions that use virtual currency. This includes the following rules:A virtual currency payment is subject to information reporting to the same extent as any other payment made in property. Virtual currency payments to service providers and independent contractors are taxable, for which self-employment tax rules generally apply. Payers must normally issue Form 1099-MISC. Wages paid in virtual currency are taxable to the employee and are subject to federal income tax withholding and payroll taxes, and the employer must report them on Form W-2. Certain third parties settling payments in virtual currency on behalf of merchants accepting virtual currency have to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions. The character of loss or gain from the exchange or sale of virtual currency is based on whether the virtual currency is a capital asset in the taxpayer’s hands. Featured image from Shutterstock