Tax Tips for Cryptocurrency
Nov 15, 2017 Posted / 8990 Views
Virtual currency has been in the light for the past few years. One type of virtual currency is the cryptocurrency. A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature.
A unique feature of a cryptocurrency is that it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. Crypto-currency has evolved in the digital era. The first cryptocurrency was bitcoin, which was created in 2009 and is still the best known. Cryptocurrency is frequently called as alt-coins, as a blend of bicoin alternative.
A lot of people are aware about cryptocurrencies but lack in the knowledge of how to use them, especially when it comes to paying taxes with cryptocurrencies. The IRS (Internal Revenue Service) keeps track of all of the nation’s tax.
One of the most often heard questions is whether or not bitcoins and cryptocurrency usage can be taxed. Yes, cryptocurrency and bitcoins can be taxed and filing the tax can be quite a tedious process. Here are certain tips that can be kept in mind while filing taxes for cryptocurrency:
Payments to independent contractors are taxable. Payers must issue Form 1099. Cryptocurrency and bitcoins must be valued in dollars at the time of payment. Wages paid to employees using virtual currency are also taxable, and must be reported on a Form W-2.
Under the “The CryptoCurrency Tax Fairness Act”, any transaction under $600 would be exempt from taxes. This means not having to worry about keeping track of loss or gain on small transactions.
A couple of years ago cryptocurrency was not famous and the people who were using it were also less in number. But the current value of the cryptocurrency economy exceeds $200 billion. In recent times, there is more awareness and more fear among people who are using bitcoins and cryptocurrency.
The IRS claims that only 802 people declared a capital gain or loss related to bitcoin in 2015. Since the awareness has been growing rapidly, it is always good to report any loss or gain related to cryptocurrency. Users who have hidden income from digital currency sales could face taxes. Some cases could even end up as criminal tax cases. Keeping track of your digital transactions and reporting it is a good practice.
The IRS says bitcoins and other digital currencies are considered property for tax purposes which is stated clearly in Notice 2014-12. This means regardless of how you use it, taxes should be paid for cryptocurrency. Every time you use digital currency, a taxable event is occurring.
IRS advises that capital gains and losses are dependent upon whether or not a “virtual currency is a capital asset in the hands of a taxpayer”, which lead to the implication that digital currency which are placed in a wallet for any time period are considered as investments like stocks or bonds.
The recipient of a gift is usually exempt from taxes for that gift. That may not always be the case when it comes to digital currencies. The issue is that gifts of property which realize a capital gain or loss upon sale are taxable. So the recipient is also indebted to pay tax. Anytime a gift is converted into fiat currency or used to purchase something, it is a taxable event.
As the IRS explains at its Bartering Tax Center, swapping one product or service for another is taxable. Earning trade or barter dollars through a barter exchange is also taxable income, just as if your product or service was sold for cash. Both must report the fair market value of goods or services received on their tax returns.
The IRS is hunting cryptocurrency and bitcoin user identities with software. They are contracted with a company called Chainalysis to identify owners of digital wallets. A follow up of tax returns and transactions is not that hard once the user has been identified. There are millions of transactions using digital money nowadays. With the huge rise of bitcoins from under $100 to over in just a few years, the IRS is also gearing up.
According to FinCEN, the Financial Crimes Enforcement Network, digital money exchanges and cryptocurrency miners should register as Money Services Businesses, and comply with anti-money laundering regulations. U.S. taxpayers must report worldwide income on their tax returns. Digital money has become more popular now and it might be less anonymous than you think. Registering digital money exchanges can help you from stay away from financial crimes.
Most often, borrowers and lenders think of loans as non-taxable. But a borrower may receive bitcoins and sell them, repaying the lender with other bitcoins, or with other forms of cryptocurrency. Although it is not clear if cryptocurrency loans will be taxed, you should try to protect yourself in your loan documents if you are either borrowing or lending.
When it comes to filing taxes, one of the biggest problems to deal with is how one should label stolen or lost cryptocurrencies. These events are also not exempt from taxation guidelines. The investor would be entitled to claim a loss for the tax year in which he discovers the loss. If a bit-coin holder accidentally loses or deletes the private keys that provide access to coins they mined for themselves, that holder would not be able to write off those losses.
Applancer is an open platform for discussion on all things like Blockchain , Cryptocurrency and Ico news updates. As such, the opinions expressed in this article are the author's own and do not necessarily reflect the view of Applancer .
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