Don't Forget About Bitcoin and Cryptocurrencies, Tax Season getting approached
Cryptocurrencies are all rage today, but come tax season they might only cause you rage. The reality is that it is one of the driving forces behind cryptocurrency development. However, they can not escape the IRS. We do not believe that the IRS tax rules, which are not in favor of this time, are due to a lack of clarity by the IRS.
The first place to start is that cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin, are not considered currencies for federal tax purposes. Back in 2014, the IRS released IRS Notice 2014-21, stating that digital currency might act like the coin and paper money does not have "legal tender status in any jurisdiction." As such, digital currency is treated as property for federal tax purposes. This is an interesting issue: if countries start treated as digital currencies as legal tender, it could change the nature of its tax treatment. However, the IRS currently does not treat digital currencies as currencies.
Further in the notice, the IRS states that normal tax rules apply to digital currencies. This means that digital currencies can be treated as business, investment or personal property, all impacting taxation. This means that digital currencies are not taxed equally between owners and miners. Some people might be subject to ordinary income taxes and others might be subject to capital gains tax treatment. But, generally speaking, the mining, receipt, sale, use, transfer, or exchange of digital currencies can create an immediate taxable event.
For instance, if you bought a Bitcoin for the purpose of buying online goods or services, any gain above your cost basis would be subject to taxation. So let's say you've got $ 100 of digital currency and exchanged it a month later for some website design services that cost $ 120. At this time, you would have a $ 20 gain based on the $ 120 received in value minus your $ 100 basis. This is also the first time that we have exchanged one of the digital currencies for another one in 2018. (There is a 1031 exchange was allowed for the new tax law changes based on IRS Revenue Ruling 79-143 which I do not know if you will be able to work with me. I do not know what to expect.
If the digital currency was purchased and held for investment purposes, it would be treated as a capital asset, and the capital gains would be available just like any other investment or stock. However, if it was held for personal reasons, you might not be able to deduct loses. Furthermore, any exchange of digital currencies for goods or services will result in a taxable event.
If you receive a digital currency as payment for goods or services, you need to include it when computing gross income. Furthermore, the digital currency should be valued at its fair market value, in US dollars, on the date when it was received. To figure out the fair market value, one should look at the exchange rates. However, this fails to address a few valuation issues. First, digital currencies have seen dramatic swings in price, gaining 100% or losing 40% in a single day. Secondly, finding accurate data from an exchange could also be difficult. Third, the exchange rates have varied widely across exchanges during a single day. All of these could create headaches for a taxpayer.
If you are an employee or self-employed, you will have to pay for the tax. The mining of a digital currency like bitcoin is treated as a trade or business, subjecting the miner to taxable income and self-employment taxes on the net earnings. In addition, if the digital currencies were then sold or exchanged, the transfer, if for a gain, could be subject to ordinary income as inventory or property held as part of a trade or business, income tax rules.
(LIFO), average cost, or a "specific, because they are taxed as property, can be sold on a First-In-First-Out (FIFO) share identification "method. Because the IRS does not currently have a stated position on the best method to utilize, taxpayers could presumably pick one that fits their situation in order to minimize taxes and maximize gains.
The biggest problem with cryptocurrency taxation is not necessarily the tax rules, as they generally follow the same tax treatment rules. The reality is that the IRS does not require digital currency exchanges like Coinbase to report or track your basis or gains. This means you will not be getting any annual tax forms in the near future. The onus on tracking basis, transactions, and taxation issues falls squarely on the taxpayer here. Coupled with the determination of fair market value for digital currency transactions at any given moment, tax filing season could be a huge headache. It is up to the digital currency owner, and it is up to you.
Remember, any time you exchange, mine, sell, or use a digital currency. This means that you will be able to trade currency on the basis of the exchange rate at which time and the value you receive in return, and you will probably be working for an accountant or tax professional that specializes in digital currencies. At a minimum, do not forget your digital currencies come tax time! (For more information on the taxation of cryptocurrencies.
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