DISCLAIMER: Jason Guck and affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
The IRS and Cryptocurrencies
At the moment, many people are involved in cryptocurrencies in one way or another. Chances are that you are as well. But how much do you know about cryptocurrencies and your tax obligations? Believe it or not, the IRS declared virtual currencies to be a taxable asset way back in 2014, but many people are still in the dark and several CPA’s have written to the IRS asking for much needed guidance. Here’s a look at what I’ve found through my own personal research.
At the moment, there are no mainstream channels through which the IRS can track down those who make virtual currency profits.
Some people took this to mean that they could keep everything they made from cryptocurrency trading. But generally speaking, people should report their cryptocurrency earnings to the IRS; and the law actually requires that they do. So, if you are making anything from cryptocurrency trading, the best thing for you to do is to just report your income.
Gains and Losses
A gain or a loss arises when the cryptocurrency is used in trade or business. Transactions that are initiated for a profit also result in recognized gains or losses. For tax purposes, the gains can be used to offset the losses. Even if you don’t receive official notice of your taxable gains, you need to report them to the IRS.
The law lets you offset your capital losses as you report your capital gains, in accordance with the law. So, even though your cryptocurrency trading might not entitle you to free profits, it does give you a chance to offset your losses against other capital gains you have made.
Essentially, a taxable event is a point at which an incident occurs that makes the party to the transaction liable to a tax. People pay taxes because they have caused a taxable event. For instance, when you receive payments in bitcoins, or mine a cryptocurrency and it becomes your own, a tax event has arisen because you have to report the transaction for tax purposes.
If You’re Spending Your Cryptocurrency Is It Still Considered a Gain/Loss?
In general, that depends. If you spend the cryptocurrency on an activity that constitutes a taxable event, then you might have to report a gain or a loss. For instance, if you use the cryptocurrency in a business transaction that results in a profit or a loss, then you have to report the gain or loss, just as with mainstream currencies. When spending the bitcoin for regular non-investment purchases, then those constitute personal losses.
How Is All of This Reported?
The manner in which income from cryptocurrency is reported depends on your status as a taxpayer. For instance, employers who pay in virtual currencies have to report the earnings the employees make to the IRS using the W-2 Forms. But the virtual currencies have to be converted into dollars as at the date when they were paid out.
Employees also need to report their cryptocurrency income; after converting the currency into dollars as per the date of payment.
If you are holding cryptocurrencies as capital assets, then you should treat them as property when reporting the gains or losses for tax purposes.
In the case of cryptocurrency miners, the income that trickles in from this activity should be reported as income under the self-employment tax laws.
What have people been doing in the previous years?
In the previous years, most people did not think that they needed to report the gains they made from trading in cryptocurrencies. For one, major brokerages, the sort that the IRS monitored, did not have virtual currencies available for trading. Many crypto traders took the chance to earn untaxed profits. But now that cryptocurrencies have gone mainstream, this has changed, in a big way actually.
In conclusion, it is highly recommended that you follow the law, and you will not run into any problems with the IRS. The government body has a right to receive reports of your earnings from all investments. And yes, that includes cryptocurrencies such as bitcoin. But this should not necessarily make you worried about the profit potential of this new form of trading. The rates can be as low as 0%, but in other cases they can be as high as 20%. So, reporting your cryptocurrency gains to the government will not necessarily result in a decimation of your earnings.
On the other hand, trying to keep your trading, and profits of losses thereof, from the government, will get you into trouble. So, think of cryptocurrencies as any other channel of investment; and be sure to report any gains and losses you make as a crypto trader. Otherwise, you will be risking fines, penalties, or worse once the IRS catches up.