Cryptocurrency has been on the rise in recent years as more and more investors recognize its potential as a profitable asset. One of the first cryptocurrencies, Bitcoin, began in 2009 and has grown enormously. Today, Bitcoin is valued higher than Disney, IBM, and McDonald’s at almost $10,000 a unit. For tax purposes, the IRS does not consider cryptocurrency to be “currency,” but rather, as property. Because of this, the tax laws and protocols are complicated even for experienced investor to navigate. It’s important for cryptocurrency investors to do their research regarding their virtual units to ensure they are properly reporting their earnings to the IRS.
What is cryptocurrency?
Before we discuss the tax landscape of cryptocurrency, you should have a basic understanding of how the buying and selling of these units of currency works. While some might think cryptocurrency is simply a fancy term for “money of the future,” it’s actually a lot more complex than that.
Satoshi Nakamoto first created Bitcoin in late 2008 as an electronic cash system without a central entity. Today, there are several popular cryptocurrencies to choose from aside from Bitcoin like Ethereum or Litecoin. To purchase or sell these currencies, you need to verify your identity and connect a bank account or transfer real funds.
Cryptocurrency can be bought and sold which is where investors are beginning to run into tax complications. While the exchange of this cyber currency can feel much like the exchange of real cash, it’s still not considered actual currency by the IRS.
How does the IRS treat cryptocurrency?
The IRS didn’t take a formal stance on cryptocurrency until 2014 which goes to show just how new this technology is. The IRS treats any gains or income from these cryptocurrencies as a capital asset which can be subject to short-term or long-term capital gains tax rates. The reason behind treating these cryptocurrencies as property rather than currency is to enforce record-keeping amongst investors.
Cashing out your cryptocurrency within a single year of buying it will cause you to encounter steep short-term capital gains taxes. Conversely, cashing out after a year will give you long-term rates depending on your tax bracket.
How should I proceed with my cryptocurrency taxes?
When dealing with the IRS, you want to make sure you have all your bases covered. It’s easy to get confused about the treatment of cryptocurrency when it comes to filing your taxes properly. The laws surrounding this virtual currency are constantly changing as the popularity of things like Bitcoin grow.
Keep accurate records of your transaction history. Don’t rely on the platform record tools to keep the best records for you. All transactions completed with cryptocurrency (both losses and gains) will need to be reported. The specific laws for reporting these assets can vary by state, so be sure to research the specific expectations for your location before proceeding.
When in doubt, consult the assistance of a tax expert before choosing to invest in cryptocurrency. A tax advisor can help you navigate the tax landscape of virtual currencies as well as provide valuable advice for investing. Remember cryptocurrency is a volatile and high risk. Doing the right research and consulting the right experts is key to success.