Read any newspaper, visit any financial website, or even watch specific television news programs and you will be deluged with information about cryptocurrency. Cryptocurrency is the current darling of the economic circuit, with some people making thousands even millions of dollars almost overnight if you believe everything you read. But with all of these cryptocurrencies gains and losses, have we forgotten about paying our taxes?
Well, it seems that the Cryptocurrency phenomenon has reached the ears of the government, and as a consequence, the tax laws regarding cryptocurrencies gains and losses have been clarified. So if you have any cryptocurrency, or are tempted to put your toe into the water, there are certain things you need to be aware of, to prevent yourself from getting into a financial predicament with the IRS. Let’s examine the current legislation so that you can get a better understanding of your tax liabilities.
Contrary To Popular Opinion Cryptocurrencies Are Not Tax-Free
Many people have turned a blind eye to cryptocurrencies gains and losses, ignoring the gains they have made in the hope that maybe things will go away, although deep down they know that this rarely if ever happens when it comes to tax collection. The most important fact you need to remember is that the IRS views digital currencies, not as legal currency, but rather as property. This was reiterated in an IRS statement which was made as far back as 2014, long before the boom year of 2017. The statement said “Digital Currency does not have legal tender status in any jurisdiction. However, this notice provides that virtual currency is treated as property for U.S. Federal Tax Purposes. General tax principles that apply to property transactions apply to transactions using virtual currency.”
The good news is that if you have simply bought some bitcoin, and have not sold it, then you most probably do not have any tax implications, because until you sell the currency and take a profit, you have not made any taxable gain. But if you are reading this today, and you have sold or traded cryptocurrencies, then here are the critical pieces of information you need to be aware of, and any action you might need to take.
1. It Is Your Responsibility To Report Any Gains and Figure Out Your Tax Obligations
Anyone who has dabbled in stocks and shares, or bonds, which is probably the majority of people reading this article will have become accustomed to receiving a 1099 tax form from their brokerage firm or bank. Unfortunately when it comes to cryptocurrencies, most companies will only issue this form for people who have generated over $20,000 in profit during the last year; in other words, the big players. So the bad news is if you are a casual investor, who was drawn in by the hype and publicity, is that you have the unfortunate task or working out how much tax you owe, and the way in which the tax law works, the responsibility is placed firmly on your shoulders. Ignorance of the law is not a valid excuse.
2. Think Of Your Crypto As Property To Guide Your Decisions
When dealing with Cryptocurrency gains or losses, the best advice is to change your mindset, and think of it as the IRS does, property rather than currency. What this means is if you have made a capital gain, then you are liable for taxes, but equally if you have somehow managed to generate a loss, then you can use this to lower your tax bill. This is where proper accounting records are essential, and you need four vital pieces of information to ascertain your profit or loss. Those four pieces of information are
- The Exact Date Your Purchased The Cryptocurrency
- The Exact Price You Paid For It
- The Date You Sold It
- The Price You Sold It For
This all sounds relatively simple, and generally speaking, it is, if you only ever made one transaction, but where it becomes difficult is when you have multiple transactions occurring, over different time periods, and that’s before some currencies are split, or dividends paid out, which only adds to the confusion. If you have concerns about your tax liabilities, you could consult with a tax professional, or visit an online resource such as Bitcoin. Tax for some guidance.
3. Never Try To Eliminate Traces Of Your Income
Tempting as it may be, never try to hide your cryptocurrency gains and losses just because you think nobody may be watching. The problem is that if and when the IRS does discover your cryptocurrency gains and losses, you could end up in a whole world of trouble. Not only could you end up having to repay whatever money you owe, but there could also be fines and penalties, and in the worst case scenario, even prison for up to 5 years.
Even if you are struggling to work out the exact amount of your cryptocurrency gains and losses and the percentage amounts, the key is to demonstrate that you did everything possible to meet your tax liabilities. This indicates that you had no intention of trying to avoid the taxes, which could be critical in any subsequent investigation.
4. Consider Opening A Separate Account For Your Cryptocurrency gains and losses.
Having read through the above, you might now be starting to stress, and realizing the enormity of the task ahead of you, trawling through hundreds of emails, and transactions, trying to get your affairs in order. Moving forward an excellent idea is to create a separate email and bank account that you use exclusively for Cryptocurrency. This means that any profit that account makes, can be entirely attributed to cryptocurrency, all the transaction details will be nicely collected in the one email account, and it will be straightforward moving forward to work out your tax liabilities. Every time you draw money out of that account during the year, put aside 25% of it for tax purposes, and that will always leave you relatively close to meeting your tax payments when they become due.
Without wishing to repeat things too much, always remember that the responsibility for these tax payments of any and all cryptocurrency gains and losses, lies fairly and squarely with you, so don’t take any risks, enjoy the thrill of the investment, but always remember that it’s not the piper you have to pay, its Uncle Sam. If you want to learn more about taxes and some of the new tax laws that have been released, consider enrolling in our Basic Income Tax Course by clicking here.