Ruth December 22, 2018 Crypto
You’ll be hard pressed to find someone who doesn’t agree – 2018 has bot Bitcoin’s coming out party. If you are about to hop onto the crypto wagon, or are already on it, don’t leave behind about Bitcoin taxation.
Almost every Bitcoin or altcoin transaction – mining, spending, trading, exchanging, air drops, etc. – will likely be a taxable event for US tax purposes.
Bitcoin and other crypto currencies
While Bitcoin receives most of the attention thesis days, it is only one of hundreds of crypto currencies. Everything wij discuss here with regard to bitcoin taxation applies to all crypto.
How the IRS sees crypto currencies
Unluckily, the IRS has provided very little guidance with regards to Bitcoin taxation. That means some mystery remains spil to how crypto taxation will ultimately take place. Ter fact, there has bot only one IRS release mentioning crypto currency and it wasgoed ter 2014.
However, one thing is clear: Albeit the public and crypto community refer to Bitcoin and altcoins to spil virtual currencies, the IRS treats them spil intangible property for tax purposes. Therefore, selling, spending and even exchanging crypto for other tokens are all likely going to have capital build up implications. Likewise, receiving it spil compensation or by other means will be ordinary income.
Interestingly enough and contrary to the IRS classification of crypto currencies, ter 2018, the US Securities and Exchange Commission actually ruled that crypto currencies are a currency. Spil a result, the SEC now regulates Initial Coin Offerings (ICOs).
Bitcoin tax implications ter the US
Almost every Bitcoin or altcoin transaction will result te a taxable event for US taxpayers:
- Trading Bitcoin produces capital gains or losses, with the latter able to offset gains and reduce tax.
- Exchanging one token for another e.g. using Ethereum to purchase an altcoin, creates a taxable event. The token is treated spil being sold, thus generating capital gains or losses.
- Receiving payments ter Bitcoin te exchange for products or services or spil salary is treated spil ordinary income at the fair market value of the coin that the time of receipt
- Spending Bitcoin is a tax event and may generate capital gains or losses, which can be brief term or long term. For example, you bought 1 BTC for $100. If that Bitcoin is now worth $200 and you buy a $200 bounty card, there is a $100 taxable build up. Depending on the holding period, it could be a brief or long-term capital build up subject to different rates.
- Converting Bitcoin to USD or another currency at a build up is a taxable event, spil it is treated spil being sold, thus generating capital gains.
- Air drops are considered ordinary income on the day of the air druppel. That value will become the fundament of the coin. When it sold, exchanged, etc., there will be a capital build up.
- Mining Bitcoin is considered ordinary income equal to the fair market value of the coin the day it wasgoed successfully mined.
- ICOs do not fall under the IRS’s tax-free treatment for raising capital. Thus they produce ordinary income to individuals and businesses alike.
Spil a general rule, any time you sell Bitcoin at an exchange, to another person, earn Bitcoin or buy goods or services, is a tax event for US tax purposes and ter many other countries.
The crypto community has hoped that the IRS will permit for the exchange of one token for another spil a 1031 like-kind exchange. However, 1031 exchanges are generally restricted to business property e.g. inventory or property held for sale to customers – not investment property such spil stocks, bonds, notes, or other securities. Some individual investment property may qualify, but there are greater confinements and it is our opinion that crypto is unlikely to fall ter this category.
For the vast majority of individual crypto holders, this means there will likely be a taxable event when exchanging one token for another, even if there wasgoed no conversion to fiat.
Also note that even if the IRS does permit for like-kind exchanges through the current tax year, the fresh Tax Cuts &, Jobs Act of 2018 boundaries like-kind exchanges to real property.
Specific identification and LIFO
Much like the 1031 like-kind exchange desire, many crypto investors are also hoping that the IRS will permit the taxpayer to identify the particular Bitcoin sold or exchanged, from the loterijlot of coins from which the coin wasgoed part of. This is known spil “specific identification.”
Similarly, investors are also hoping for Last-In-First-Out (LIFO) treatment to be an option. Each would permit the taxpayer the capability to manage their brief and long-term capital gains. However, there is no way at this time to identify with the exchange which particular coin you are selling. Therefore it is very likely that the IRS will default to First-In-First-Out (FIFO) treatment.
Of course this information exists on the Blockchain. However, presently the exchanges and wallets are not set up to choose which coins to sell or exchange.
Detailed record keeping
To make matters more complicated for Bitcoin taxation, digital exchanges are not brokers regulated by the IRS. That means they do not punt a 1099 form, strafgevangenis do they calculate gains or cost voet for you. Many don’t even permit you to transact ter dollars, instead opting for Ethereum.
Wij strongly recommend that you keep detailed records of all your Bitcoin or other crypto transactions. Fortunately, there are services that can take your trading history and provide you with fairly clean outputs for Schedule D on your tax comeback.
IRS is coming after crypto
Spil always, all US citizens and residents have to pay tax on worldwide income, including income from cryptocurrency. If you had more than $10k USD omschrijving te aggregate holdings across your accounts with foreign exchanges on any given day, you voorwaarde also report your accounts on FBAR filings. Te addition, your host country or country of business may impose different Bitcoin tax rules.
With only several hundred people reporting their crypto gains each year since Bitcoin’s launch, the IRS suspects that most crypto users have bot evading taxes by not reporting crypto transactions on their tax comes back. The latest order for Coinbase to arm overheen user records to the IRS indicates the determination of the IRS to zekering this tax evasion.
Without a doubt 2018 will be a landmark year for IRS enforcement of crypto currency gains. Given the level of information stored on the blockchain it is likely only a matter of time until IRS audits catch up with the enhanced use of digital currencies.
Taxpayers should stay ahead of the spel, rather than be reactionary. The IRS is always more lenient with taxpayers that come forward on their own accord rather than those that get discovered. Coming forward now could actually be the difference inbetween criminal penalties and simply paying rente.
How to overeenkomst with crypto taxation
Not all tax accountants have practice with Bitcoin taxation. Wij have helped numerous clients te the crypto space, including high volume traders and miners.