Is cryptocurrency taxable? This is a question you need to ask yourself and also find an answer to if you get Taxed for buying, selling, or mining Crypto Currency? Bitcoin and the rest of cryptocurrency, in general, keep breaking records each day and the whole world is watching. Do you want to know who also is watching, the internal revenue service? So if you trade on cryptocurrency it is important you understand just how it impacts your tax liability.
Is Cryptocurrency Taxable
Once again is cryptocurrency taxable? The answer to this question is YES! Crypto Currency is taxable. And to understand more about how you are taxed and how to calculate how much you owe in tax after making crypto transactions continue reading.
According to a blog post on Forbes, a cryptocurrency is a decentralized, digital store of value and medium of exchange. This is not like every other type of currency like the dollar bill or anything physical. It is digital and lacks any type of governmental control or oversight.
Cryptocurrencies rely solely on encrypted ledgers which can also be referred to as blockchain technology. This very blockchain technology can be used to record and verify all transactions involving cryptocurrency. You can also think of a blockchain as a checkbook that’s updated regularly that tracks every single one of your transactions made in any given cryptocurrency. In 2009, the first-ever cryptocurrency was launched. And today there are thousands in circulation including Etherium and dogecoin.
Do I Need To Report Cryptocurrency on My Taxes
Do you really need to report Cryptocurrencies on your taxes? While Cryptocurrencies have grown very popular over the years if you own any in your possession you should be extra careful as to not have any IRS-related issues. Just last year the IRS began a highly publicized crackdown on crypto tax evasion.
And many crypto traders found their selves in the wrong side of the IRS for violating tax laws unintentionally. Therefore following the IRS set down rules is now important than ever before.
Cryptocurrencies as you should have known are very volatile providing more opportunities for traders. Some traders however failed to report their earnings to the IRS. Some traders were unclear with the rules in the early days and so never knew they owed crypto taxes.
After bitcoin went mainstream in 2017, the IRS paid more attention and in 2019 it launched its virtual currency compliance campaign in an effort to curb the noncompliance among virtual currency holders.
And as part of the campaign, the IRS sent letters in the thousands to suspicious traders. And if you received any of the letters it is very important you respond to it immediately. To easily avoid being entangled with the IRS, it is important that you keep things honest and transparent. Always report your crypto earnings accurately. Calculate your loss and gains to ensure that your figures are correct.
How Is Cryptocurrency Taxed
Taxes imposed on Cryptocurrencies are based on the 2014 IRS ruling that determines cryptocurrency should be treated as capital assets like bonds and stocks and not like a paper currency. This decision however has major constraints for users who own Cryptocurrencies. The ruling opens them up to complicated taxes.
Let’s say you purchase a good or product with cryptocurrency and the amount of crypto you spent gained in value over what you paid for it, your spending, therefore, incurs capital gains taxes. You should also know that capital assets are taxed whenever they are sold at a profit.
For example, you bought $20 worth of bitcoin and it rose to a value of $200 in the period you held it. If you then bought a product of $200 using the bitcoin. Then you would owe capital gains on the $180 in profit you had realized. Although it looked as if you spent the bitcoin rather than you sold it, it all means the same for the IRS.
Jeff Hoopes, an associate professor at the University of North Carolina; and research director of the UNC tax center has something to say about taxes imposed on cryptocurrency. He said, “the fact that the IRS decided to tax crypto as a currency asset may have been because of the way most people treat it.
I assume the IRS decided this because most people hold crypto as an investment, and we tax the appreciation on capital assets held as an investment.”
Tax partner at Baker Botts, Jon Feldhammer also has this to say, “but the IRS’s decision may have also been a pragmatic move. Cryptocurrency started having trading volumes in the tens of millions of dollars each day, and it was clear the IRS was missing out on a significant tax revenue source.”
Is Cryptocurrency Tax Exempt
Cryptocurrencies are not tax-exempt as mentioned already in this post. Even when they are received as donations, gifts, or inheritances, taxes are still imposed on them. An appraiser will have to assign a fair market value for the coin but based on its market price at the said time.
The donor however is not required to pay any taxes on the price gain. Gifts of cryptocurrency that are below $15,000 are not subject to income in any way.
Should the recipient or receiver of a crypto gift over the sum of $15,000 decides to sell the gift, their cost basis will remain the same as that of the donor. Crypto assets that are inherited are treated the same way as other assets. This simply means that they are subject to the same estate regulations as other assets.
Taxable Cryptocurrency Transactions
The IRS is always on the lookout for taxable events when it comes to Cryptocurrencies which can only occur upon the sale or trade of the asset. You should know that when you buy, sell, or hold Cryptocurrencies as well as mine, it does not incur taxes. It is only when an asset is sold that you can incur taxes. If you made any of the transactions, it could be that you owe taxes;
- Trading cryptocurrency to virtual currency.
- Trading cryptocurrency to fiat currency
- When Trading Cryptocurrencies in compensation form for goods or services.
- Units of a cryptocurrency are received as the result of a fork.
Lastly, when you receive Cryptocurrencies in the form of gifts, a taxable event is not created here. But when the gift is over the gift exemption amount, a taxable event is created.