Cryptocurrency taxation
What is Cryptocurrency?
Cryptocurrency is a digital currency. It can be considered as a form of payment in some cases (it allows to buy goods and services) and an investment in other cases.
Cryptocurrency utilizes cryptography to verify and record transactions on distributed ledgers called blockchain. The first cryptocurrency was launched in 2009 and was Bitcoin. Nowadays there are many more, literally thousands.
Virtual currency which can be traded among users and can be exchanged into other currencies like for example USD, Euros, is called “convertible” virtual currency like Bitcoin for example.
Some companies have issued their own currencies that can be used to buy goods or services provided by the same company. Of course, in order to buy those goods or services, you need to exchange real currency into cryptocurrency.
How is Cryptocurrency Taxed?
According to IRS cryptocurrency transactions are taxable like transactions in any other property, therefore they might have to be reported on tax returns.
You can refer to IRS Notice 2014-21, IRB 2014-16, issued by IRS to guide individuals and businesses on the tax treatment of such transactions.
Individuals who hold cryptocurrency as a capital asset and are not engaged in the trade or business of selling cryptocurrency can also refer to a section called Frequently Asked Questions on Virtual Currency Transactions.
The IRS treats Bitcoin and other cryptocurrencies as “property”. Therefore, they are treated like capital gains treatment similar to traditional assets like stocks and bonds. In some cases, anyway, they are treated as income, so they are subject to income tax.
For example, if cryptocurrency is received through a marketing promotion it is considered: taxable income.
If it’s received as payment for goods or services, it is considered taxable income.
If it’s sold to realize an investment gain, taxes are owed on the gain, as it happens with stocks.
Also, if one cryptocurrency is converted into another, taxes are owed on any gains on the transactions.
Taxes are owed only if you realize a profit. If you sell or spend cryptocurrency at a loss no taxes are owed on the transaction.
For example, if you buy 100$ in cryptocurrency and sell it at 150$, you have a gain of 150$ and that would be the taxable gain for IRS.
If you buy $100 and sell it for $80 you don’t have to pay taxes. You could even utilize the loss to compensate for other investment gains.
The amount of taxes on capital gains also depends on how long you’ve held the cryptocurrency.
If it’s less than one year (before you spend or sell them), the profits are considered short-term capital gains. They would be taxed at the normal income tax rate.
If it’s more than one year, the profits would be considered long-term capital gains, and they would be taxed at another rate, lower, which depends on the annual income you have.
For all these reasons it is important to keep a record of all your cryptocurrency activity, both purchases and sales. There are crypto exchange platforms with built-in applications that can generate reports for you or your CPA. This helps you calculate gains and losses, that is the difference between the price you originally paid and the price at which you sold, which is the basis for all your tax calculations.
Anyway, your CPA can help you meet all tax law requirements regarding cryptocurrency. Our offices at your disposal.
More information can be also found at https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies