Cryptocurrencies, such as Bitcoin and Ethereum, have been around for a decade now. Little needs to be said about their popularity- Coinbase, a cryptocurrency exchange, has over 35 million registered customers. However, if you look at the fact that only a few hundred traders were reporting their crypto trades until recently, you will realize that you are not alone. If you are not up to speed with declaring your crypto trades and assets to the IRS, then you are at the right to get started.
So how are cryptocurrencies taxed? How do you evaluate the taxes you owe due to your crypto assets? Questions like these and many others are what we will answer ahead.
When are cryptocurrencies taxed?
Even though cryptocurrencies look like money, store value, and can be used for an exchange, they are neither currency nor securities. The IRS has declared that Bitcoin and its competitors are property. Thus, since cryptocurrencies are capital assets, how they are taxed is also similar to other such assets. There are capital gains and losses when you exchange them for cash. With that cleared up, it is important to know the events when your cryptocurrencies would be taxed.
Taxable events for cryptocurrencies
Your cryptocurrency broker does not have to issue 1099 forms to its customers. However, as a trader, you must disclose all activity to the IRS unless you want to face charges for tax evasion. Thus, in simpler terms, none of the crypto intermediaries, brokers, or exchanges are obligated for furnishing tax reports to the participants. You as the trader have the responsibility to maintain all records for all dealings in crypto assets. Understanding how and when cryptocurrencies are taxed is the first step to doing that. The taxable transactions with regards to cryptocurrencies include:
- Selling your cryptocurrency for real money (cashing out)
- Using cryptocurrency to pay for a product or service
- Selling your cryptocurrency in exchange for another cryptocurrency
- Receiving forked or mined cryptocurrencies
A few events are not taxable as specified by the IRS, including:
- Using fiat money to buy cryptocurrency
- Donation to a tax-exempt charity or non-profit in the form of cryptocurrency
- Gifting cryptocurrency to a 3rd party
- Transfer of crypto between wallets
Cryptocurrency bookkeeping rules of thumb
Despite having been around for over 10 years, cryptocurrency laws and regulations are still new, with many in the formative stage. There are a few things that you take care of while bookkeeping your crypto-assets to avoid getting into issues with the IRS.
- A taxpayer must account for the fair market value of the cryptocurrency as taxable income when using it to pay for a service or product.
- The fair market value of a cryptocurrency is evaluated on the date it was acquired.
- As a taxpayer, you can have a virtual gain or loss on your cryptocurrency. For example, if you bought a bitcoin at its peak, you will probably have a loss as price falls. It is vital to record the cryptocurrency’s value the time it was received and spent to accurately calculate this.
- For regulatory compliance, when Bitcoin is accepted as an income, a valuation strategy must be selected and recorded in 1120 Form or Schedule C. They should then reduce by expenses for business as the year progresses.