Taxes and Cryptocurrency

Published on: 28 May 17:36

The saying is so old most of us cringe when we hear it — “nothing in life is certain except death and taxes.” No one likes to think about either, but both are a part of life that must be planned for and anticipated, and no one (and no thing) is exempt. This includes cryptocurrency.

Cryptocurrency is a digital currency that uses blockchain technology (or an open-source ledger) to record transactions and that uses cryptography to secure transactions. Cryptocurrency is a decentralized monetary system, which means no government can control or influence its value. That being said, as a currency, its transactions are taxable. However, due to the complex nature of cryptocurrency, many people are not paying their taxes on it. But as the IRS gets more adept at cryptocurrency itself, you can bet that they will come after you for unpaid taxes on cryptocurrency at some point.

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TAXES AND CRYPTOCURRENCY

All trades in cryptocurrency in which you gain or lose money have to be reported to the IRS. If you exchange cryptocurrencies for another, convert the money back to dollars, or even just purchase something with cryptocurrency, you have to pay taxes. Cryptocurrency is a currency and has monetary value; thus it is subject to rules and regulations.

If you choose to not report your cryptocurrency revenue or losses to the IRS, you’ll face the same tax fraud charges you would with any other violation of the tax code. Penalties include large fines and jail time.

As cryptocurrency continues to grow and become more mainstream, expect the IRS to tighten down on charging people with cryptocurrency tax fraud. Between 2013 and 2015, only 900 people filed cryptocurrency taxes.

Wait just one second. Wasn’t the whole reason cryptocurrency was invented was to skirt the control and oversight of the government, including paying taxes? Yes, it was and still is. However, for now, the IRS wants its share of your cryptocurrency profits, so it has designated cryptocurrency as property, similar to real estate, and not as a currency (counterintuitive, yes. It’s ironic how humans want someone watching over them, but at the same time, they don’t). Hence, cryptocurrency is subject to capital gains taxes, which is a tax on the profit of an asset that has been sold.

There are no special rules for cryptocurrency beyond the rules of capital gains taxes. There are short-term capital gains taxes and long-term capital gains taxes, all of which are different depending on the state in which you live and your tax bracket. In general, long-term capital gains’ tax rate is usually less than short-term.

There are thus three events you have to worry about then with regards to cryptocurrency and capital gains:

  1. Exchange cryptocurrency for another currency
  2. Sell cryptocurrency that leads to a gain or a loss in US dollars
  3. Spend cryptocurrency to purchase products

Trading on the margin with cryptocurrency and crypto-to-crypto currency exchanges are also subject to taxes. Tracking all of these exchanges can be cumbersome, but the blockchain keeps the record for you. Luckily, more cryptocurrency exchanges as well as software wallets are beginning to incorporate tracking exchanges for you.

If you’re paid in cryptocurrency by an employer, that money is subject to both federal and state income tax when classified as earned income. Cryptocurrency income is taxed the same way as regular earned income and in the same tax income brackets.

Most cryptocurrency owners are investors. This means you will most likely be using the Sales and Other Dispositions of Capital Assets IRS Form 8949 to report on digital trades, as well as Form 1040 Schedule D. cDuel recommends speaking to a CPA at least the first time you file cryptocurrency taxes. It can be easy to mess up, and the last thing you want is an IRS audit because you have cryptocurrency on your taxes that are filed incorrectly.

Cryptocurrency miners are considered self-employed, and thus they have to pay taxes on their cryptocurrencies earned. A cryptocurrency miner is the person who verifies the cryptocurrency transactions and then adds it to the blockchain. However, as a business-owner, you also have all the rights to tax deductions business owners have, which means you can write off expenses such as electricity and depreciate your computer equipment. Again, cDuel recommends having a certified public accountant handle your taxes when cryptocurrency is involved.

For clarification, buying and holding cryptocurrency is not a taxable action. Selling this currency is. And if you lost money in cryptocurrency trading (something cDuel hopes to prevent with its free cryptocurrency trading simulator), then you can save on taxes as well.

ITEMS YOU’LL NEED WHEN FILING CRYPTOCURRENCY TAXES

For each and every transaction, you’ll need:

TIPS FOR PAYING CRYPTOCURRENCY TAXES

THINGS TO KEEP IN MIND WITH REGARD TO CRYPTOCURRENCY AND TAXES

Because cryptocurrency is such a new invention, rules and regulations with regard to the tax code can change (and expect them to) as more uses for cryptocurrency evolve and as more people begin to invest in cryptocurrency (thus more money for the federal and state governments). For example, tokens in cryptocurrency (which represent a service or an asset and aren’t themselves currency) for now are tax exempt since they fall out of the official definition of cryptocurrency set by the IRS. It’s best to always consult with a tax accountant with regards to cryptocurrency.

Due to recent legislation, all of your crypto sales, exchanges, and purchases are taxable, down to the smallest transaction. All currency swaps in cryptocurrency are taxable as well.

HOW CDUEL CAN HELP

cDuel believes that cryptocurrency will one day replace modern currencies. However, before that happens, it’s best that you prepare yourself by learning what cryptocurrency is, how to trade it, and how it can benefit you. On our blog, you can find valuable educational materials to help you digest terms such as blockchains, miners, and Ethereum. You can learn all about cryptocurrency and how it will affect you in the future.

cDuel offers a free cryptocurrency trading simulator specifically designed to offer you a risk-free trading environment to practice your trading skills. One of the main benefits of this currency exchange simulator is that you’ll gain practice learning the ins and outs of trading a variety of cryptocurrencies. You’ll also learn from others as you compete against them and see how they trade as well. There is really no downside to signing up with cDuel. You’ll learn, have fun, and prepare yourself for the future. Visit us online to get started today!