Think you can hide your digit currency earnings from the IRS? Think again. If you’ve been investing in and/or using cryptocurrency, you should be reporting that on your taxes. But not in the way you might think.
Put simply, cryptocurrency is a digital currency is a digital asset that is traded and secured using cryptography. There are no banks involved, only a giant database (called Blockchain) that acts as a secure ledger for peer to peer transactions.
How the IRS Views Cryptocurrency
Although currency is part of its name, the IRS actually views cryptocurrency as property – which means there could be capital gains implications. The IRS hasn’t provided much guidance but they are definitely checking. In fact, they’ve asked Coinbase, one of the world’s largest cryptocurrency exchanges, to turn over the user data of its 13,000 users.
If you are currently selling, spending, or even exchanging cryptocurrency for other tokens, all of those actions will likely have capital gains implications. And, if you were paid in cryptocurrency, you will definitely need to report that as income.
Here’s a rundown of taxable actions with regards to cryptocurrency:
- Trading cryptocurrency: produces capital gains and losses.
- Exchanging cryptocurrency: treated as being sold and is subject to capital gains.
- Receiving payment in cryptocurrency: receipt of payment for goods and services whether in cryptocurrency or not – is seen as income and must be reported as such.
- Spending cryptocurrency: still a taxable event is and treated as a capital gain or loss.
- Converting a cryptocurrency to a U.S. Dollar: Capital gains
- Mining coins: considered income equal to the fair market value of the coin.
Cryptocurrency is all the rage right now as its value continues to rise. But just because there are no financial institutions involved doesn’t mean you can get one past the IRS. If you’ve got questions about cryptocurrency and the tax implications behind it, give us a call. We’ll help you claim it properly and help you make the right moves so that you’re in the best financial position possible for this year and future years.