When it comes to cryptocurrency and taxes, ambiguity reigns. Bitcoin and Ethereum are still ter the early stages of development, and their values are enormously volatile.
Spil of early December 2018, one bitcoin wasgoed fluctuating inbetween $15,000- $Eighteen,000, and its value has switched dramatically overheen the past year alone.
Cryptocurrencies are designed to be a more efficient and reliable form of decentralized currency that anyone can buy and sell through online exchanges. They can be digitally traded for or exchanged into U.S. dollars, euros or any other form of currency (real or virtual). With the right computers, they can also be “mined” using ingewikkeld computerized algorithms to uncover fresh cryptocurrency value, much like mining gold.
But spil cryptocurrencies grow ter popularity and value, what are the tax implications for mining, trading and spending?
Whenever cryptocurrencies are mined, bought, sold, spent or traded, there are tax implications.
Taxpayers who receive crypto spil payment for goods or services vereiste determine the fair market value te U.S. dollars when received.
Taxpayers who mine coins are subject to tax on the fair market value on the day mined. Depending on the business structure of the miner, the income could also be subject to self-employment tax.
Accounting for cryptocurrency is just spil significant spil accounting for buying and selling stocks and bonds.
Ter 2014, the IRS proclaimed cryptocurrencies should be treated spil property for U.S. federal tax purposes and go after the general tax principles applicable to property transactions. This means they’re subject to capital gains tax, similar to stocks and bonds or real estate.
Ter some cases, you may be considered a trader and the netwerken income from your trading activities could be ordinary income.
Do people have to track the cost of acquiring each cryptocurrency or token? How can they offset gains with losses? Will the IRS consider tokens to be property just spil cryptocurrency?
A recently introduced bill aims to make up for the lack of regulations. The Cryptocurrency Tax Fairness Act (CFTA) of 2018 would require the IRS to provide extra guidance on how transactions of more than $600 should be reported.
But how should miners and traders prepare?
- Establish a record-keeping system: Create a reliable record-keeping system that identifies your cost-basis method and exchange rate. The key to ensuring income is measured accurately? Keep detailed records of transactions. Keep separate wallets for short-term trading, long-term buy-and-hold positions and private spending.
- Track costs: Consider third-party exchanges or wallet services to track your cost poot. The IRS requires you report the fair market value for the date the currency wasgoed received. Unless they have a consistent method of tracking daily value, active traders with short-term capital gains might be taxed like day-traders spil business income, and not capital build up.
- Converting: Recall that taxes are paid ter dollars. Think about converting your crypto to dollars on a regular schedule so that you have enough dollars to remit any income tax if due.
- Tax deferred exchange: There are some considerations that exchanging one cryptocurrency into another could be reported under IRS Code Section 1031 spil a like zuigeling exchange and the tax can be deferred. But, if inbetween currencies you stir te and out of ‘fiat,’ then this would not be available. Te some cases, only an exchange on the same blockchain could qualify for thesis benefits — for example, Bitcoin for Bitcoin Metselspecie. Te other instances, any cryptocurrency for another may qualify for this tax benefit. The presently proposed tax legislation has proposed that only real estate transactions would be able to use this tax strategy ter the future. That will make 2018 the last year you can exchange one cryptocurrency for another on a tax-deferred onderstel.
- Spending: The IRS has determined that spending crypto is the same spil if you sold it. So, if you are loading your crypto on a debit card or going to an ATM and drawing contant, those transactions are spil if you just sold your crypto, and you have to track your taxable gains or losses.
- What about those tokens: Wij do not believe an exchange of crypto into tokens qualifies under Section 1031. The purchase of a token would be spil if you sold your crypto and purchased another asset. However the IRS has not ruled that tokens are considered “property,” wij believe that is likely going to toebijten te the future.
Understanding the taxation of cryptocurrency is a challenge, at best. Values are very volatile. The IRS inevitably will take an official stance on regulations.
Without professional tax and accounting help, taxpayers may find themselves on the wrong side of the coin.
Mr. Kopelman is Partner-in-Charge of Technology, Business Tax, and Biosciences at Aprio, a 2018 ATDC program sponsor.