The cryptocurrency market has been on quite the roller coaster. Since going mainstream, new investors bought in, watched the market explode, and then tank. While to some, it was almost like a game watching how virtual currency rose and fell with such intensity, the federal government decided they should also take part. The Internal Revenue Service (IRS) released guidelines in 2014 deeming cryptocurrency as taxable. Here’s how you can cover your bases with Bitcoin or Etherium investments.
Cryptocurrency is Property
Rather than thinking of cryptocurrency as cash, the federal government considers it to have equivalent value to property. Consider Bitcoin as stocks, bonds, or even more physical, like a house or a car. But you only have to worry about reporting cryptocurrency on your taxes if you sold your shares, which means you have capital gains to declare. On the flip side, you can lower your taxes if you’ve realized a capital loss by selling your investment, which, as the market is now, is most likely. These are all considered taxable events.
Reporting on virtual currency is not regulated, so there is no centralized financial institution keeping track of your capital assets. This means you must keep track of your cryptocurrency transactions on your own. Since cryptocurrency is such a volatile market and you were likely buying and selling frequently, this can be a daunting task. Bitcoin.tax, Cointracker, and Cointracking.info are record-keeping sites that can help track your trades to declare on your taxes (Schedule D on the 1040 form). You will need to report purchase price, when you sold it, and how much you received for it. Those in the industry have suggested looking at it as first in, first out.
Mining for crypto, solving transactional codes to gain currency, may seem like a passive way to generate income, but that amount also must be claimed under self-employment income. You must report the amount in your gross income based on what the fair market value of the coin is at the time of mining.
C&D | Cryptocurrency
The federal government’s guidelines on taxing crypto are murky, at best. We have been in financial planning long enough to help you declare your virtual currency. One thing the IRS is clear about is the penalty for tax evasion. If you fail to report, you may be subject to criminal prosecution. A statement released in March 2018 reiterates that “taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions.”
Schedule a consultation with us today to claim cryptocurrency taxes correctly.