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Taxation of cryptocurrency

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Cryptocurrency has been on the rise in recent years. This is mostly due to its decentralized nature, which means that any government or bank does not regulate it. Cryptocurrencies are typically used for online transactions, but this may change as more and more people start using them to pay for goods and services in the real world. It’s important to know how cryptocurrency will be taxed if you own some yourself. In this article, we will discuss the taxation of cryptocurrency.

Photo by Bermix Studio on Unsplash

Let’s get started.

IRS Treatment of Cryptocurrency

The Internal Revenue Service (IRS) recently issued guidance on treating virtual currency transactions. The IRS treats cryptocurrency as property for federal tax purposes, not a dollar or a euro currency. This means that every time someone buys something with Bitcoin, they are also subject to capital gains taxes, paying a percentage of the profits made from buying and selling Bitcoins over their lifetime.

Suppose you buy one bitcoin today at USD 1000 and sell it tomorrow. In that case, you’ll be taxed like you bought stock in BTC Inc because your holding period was less than twelve months – any profit between now and then would be considered short-term capital gains, which are taxed higher than long-term capital gains. Bitcoin Profit is a leading trading platform that could make you earn a lot of profit.

Exchanged for other cryptocurrencies

Suppose you exchange your cryptocurrency for other cryptocurrencies. In that case, the gain or loss is calculated in U.S. dollars and then converted to the appropriate currency at the exchange rate on the conversion date. For example, if you buy one Bitcoin for $8000 and later sell it for $10000, you gain $2000.

This would be reported on your tax return as income in the year you sold the Bitcoin. If you exchanged your Bitcoin for Ethereum, and the exchange rate was $1000 per Ethereum on the date of the exchange, then you would report a gain of $1000 (not $2000) on your tax return.

IRS Enforcement

The IRS has been stepping up its enforcement of cryptocurrency taxation in recent years. In October 2017, the agency sent letters to over a thousand taxpayers who may have failed to report their digital currency holdings on their tax returns. The IRS has also been working with exchanges to obtain customer transactions.

In December 2017, the IRS issued guidance on treating virtual currencies for tax purposes. The guidance stated that virtual currencies are treated as property and that gains and losses from virtual currency transactions must be reported as capital gains and losses.

The IRS will likely continue its crackdown on cryptocurrency taxation in 2018 and beyond. Taxpayers who have not properly reported their digital currency holdings should consult with a tax professional to determine their best course of action.

The Bottom Line

Cryptocurrency is treated as property in the eyes of the law, not currency. The IRS treats cryptocurrency like stock or an investment asset (see Bitcoin and Taxes: A Crypto Tax Guide for 2018). This means it’s subject to capital gains taxes—meaning you’ll need to pay taxes on any profits made from selling your crypto coins.

 

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