The day-by-day improving digital technologies have left nothing untouched by its advancement; the newest form of digital currency, cryptocurrency to be precise, has revolutionized the whole ecosystem of transactions in today’s world. And for obvious reasons, different measures are being taken to provide optimum security to online transactions and encryption technology is one of those steps which serve the purpose very well.
The likability of such new currencies is riding high as it seems to be a profitable investment to many and also operates independently of a central bank. However, the rising of these new currencies like Ethereum, Bitcoin, and Ripple has also offered many taxable events to the government. Those investors who are not aware of the right ways to present their cryptocurrency gains for federal income tax purposes must need to consider these basics before engaging in any penalties or loss.
What It Actually Means?? Paying Taxes On Cryptocurrency In United States.
The Internal Revenue Service (IRS) hasn’t revealed many tidings about the virtual currency other than issuing general tax principles guidelines for the digital currency investors. With the come forth of this guidance in the year 2014, it is cleared that cryptocurrency will be considered as a digital asset and not stand similar to a currency like U.S. dollar. However, the digital asset can be converted into cash if required. Basically, it is treated similar to real estate or gold and thus comes under the capital gains tax rules either in the case of profit or loss.
Let’s be aware of the basics now…
a. The calculation of profit and loss are similar to that of buying and selling stocks in the case of cryptocurrency investments. So, the taxpayers who are buying or selling their virtual currency must rely on similar tactics.
b. Taxpayers must also know that selling, spending, and exchanging digital currency with other tokens follows the same capital gains implications.
Even in the conditions such as holding period, triggering event, or actual cost plus purchase/reinvestment will change the tax rates.
Now that you know — cryptocurrency is treated as property according to U.S. tax purposes — it is must to have a glance at all the crypto transaction conditions and their tax implication cases.
1. Trading Cryptocurrency is a taxable event in the eyes of federal tax laws; whether you trade cryptocurrency to make basic monetary like Dollar or use it to buy or sell another virtual currency, both conditions will raise the tax.
Note: In the case of capital loss while trading cryptocurrency, you (taxpayer) can offset gains by reducing the tax.
2. Exchanging Cryptocurrency with any other token counts as being sold and thus frames a taxable event.
3. Receiving Cryptocurrency as payment for offering goods and services is treated similarly to getting a salary and thus raises the sales tax. In order to know the worth of your gained salary, you (taxpayer) need to calculate the fair market value of the digital asset at the time of the trade.
4. Spending Cryptocurrency to buy another product also creates a taxable event and may also generate capital gains or losses alike conditions. However, the gain and loss can be short-term or long-term depending upon the holding period.
5. Presenting Cryptocurrency as a reward or gift is not considered as a taxable event, however, the gift tax may apply if it exceeds the gift tax allowance limit.
6. Mining Cryptocurrency is considered the same as the ordinary income and IRS only counts the profits taxable and termed it as self-employment income.
7. Transferring Cryptocurrency (wallet-to-wallet) is not a taxable event.
Hence, it is self-understood that crypto investments like buying, holding, or transferring doesn’t raise the tax implications. A taxpayer will realize capital gains or losses during the trade, sell, or usage of the virtual currency. Any gain or loss will be accounted on the basis of the actual fair market value at the time of the event.
Till now, I hope tax implications sound simple to you. But, the calculations are surely not. So let’s discuss some basic terms, calculations, and periods to cognize crypto-world more precisely.
Enumeration of capital gains
According to IRS guidance, the calculation of capital gains or losses is measured by determining the rise or fall position of cost basis right from the time you acquired the asset as long as there’s not any taxable event.
What is the basis in actual?
The cost that you pay in order to buy the asset (in this case, cryptocurrency) is called basis. However, the actual cost is referred to as a “cost basis” because adjustments can be made to the basis as per the need. Any addition to the basis, either a new purchase or reinvestment, will be taken as your actual cost plus the cost of each subsequent purchase/reinvestment.
Taxable event… What it means??
In simple terms, taxable event occurs whenever an asset is approached for sale or deposition. In the case of cryptocurrency, taxable event alike condition arises whenever any sort of trading is done using it or, at times when cryptocurrency is utilized to buy products or services.
As of now, the IRS doesn’t entertaining any third-party to forecast reports for the virtual currency transactions, therefore, a taxpayer doesn’t require to issue form 1099-B or any other equivalent form at the end of the tax year.
And… What about holding period?
Typically, the time span between the acquisition of a digital asset and occurring of taxable event is known as holding period. Anyone can hold the asset as long as he/she wants. However, if someone holds an asset for more than a year prior to the taxable event, it is referred to as a long-term gain or less. Similarly, the case of less than a year or one year will be considered as short-term gain or loss.
Recommended Read: How Cryptocurrency Investors Can Strategize Their Tax Returns
Bottom line
According to IRS, only 807 taxpayers have mentioned transactions related to the bitcoin in the year 2013. In the year 2014, the number just raised to 893 whereas, in the year 2015, the number fell to 802. Concerning these ratios, IRS said that taxpayers aren’t taking their taxable events on cryptocurrency seriously and ask them to report and pay raised taxes on digital currency nicely.
Undoubtedly, the IRS is doing reporting cryptocurrency as an adherence for all the investors/ dealers. Accordingly, try to stay aligned in the digital game by accounting your records and tax reporting properly.