In the draft form 1040 issued by the IRS, the first question on Section 1 asks:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
With innovation in technology, cryptocurrencies are growing in number. It provides access to a large amount of capital with limited constraints as compared to physical currency. We are seeing a shift in the usage of crypto from trading and speculation to the real-world utility.
This economic freedom, however, is subject to government taxes just like any other form of income. There are still several areas that need to be more analyzed for IRS to provide better cryptocurrency guidelines. But authorities worldwide are taking legal actions against people who don’t pay taxes on their cryptocurrency holdings.
Cryptocurrency Tax Laws Guidance for Bitcoin Investors
Crypto Coinbase has almost 35 million accounts, but the reported number of taxpayers in crypto trade is still in hundreds. In the past, people pleaded ignorance of tax laws regarding the crypto, but after the IRS cryptocurrency guidelines, it is impossible.
Here are key areas of cryptocurrency tax rules:
Cryptocurrency is a Taxable Property
Bitcoins and other cryptocurrencies like Libra, Ethereum, Ripple, etc. are like money as they are a means of exchange and a store of value. However, IRS has defined these assets like property, not currency or securities. As they are considered as property so they must be taxed as such.
Just like any other capital asset, the crypto-currency gives rise to capital gains or losses when exchanged in the crypto market. If a coin is held for-profit then it is taxable as a short term profit if held for less than a year or long-term if held for more than a year. If there is profit, there is also a deductible capital loss. To calculate profit or loss, start from the basis of the asset, i.e., the purchase price. You can also contact some of the best accounting firms to help you with the calculation of tax on your crypto assets.
Taxable Transaction Does Not Only Include Sales
According to the law, you have to report the allocation of your crypto coin if you sell it for cash, use it to buy something or trade for other cryptocurrencies. Just the sale of crypto is not the only form of taxable transaction. However, if you just merely transfer coins, e.g., from your wallet to an exchange, this is not allocation and does not have to be taxed.
Blockchain Forks Create Ordinary Income
There are two kinds of forks:
- Soft fork: It is just an update to the existing ledger that leaves both old and new ledger compatible with each other.
- Hard fork: In Hard fork, the coin splits up, and old and new ledgers are entirely separate and independent. A hard fork creates a brand new, separate currency than the old ledger. A transaction involving these ledgers are recorded separately.
Hence, when it comes to hard forks, the Bitcoin holder gets an equivalent amount of income for free. Therefore, it is taxable under the law. To determine the amount of taxable income, the owner has first to establish a fair market price of the new crypto coins. It is usually the price a buyer is willing to pay to the seller. However, there are problems when there are no buyers or sellers in the market. For example, in 2016, the Ethereum Classic had no trading for several weeks.
Airdrops and Mining Generates Income
An airdrop is a distribution of crypto units known as coins to different ledgers and is considered ordinary income by the IRS. Airdrop can be used for many purposes like to distribute previously purchased coins to reward users of the currency or new currency after a hard fork.
In such cases, the owner has ordinary income when he receives the currency after the transfer, selling, exchanging, or disposing of the coins. The amount is equal to the fair market value and is taxed accordingly. According to IRS, if you receive cryptocurrency through hard fork or airdrop, you are obliged to pay tax on it.
Mining also generates income that is taxed. Let’s say you joined a mining pool and spend $5,000 and get a reward of bitcoin worth $6,700. Even if you don’t sell or exchange the coin, you have to report the profit of $1,700 that is treated as ordinary income. You still have to pay tax on this profit even if your coin collapses in value in the future.
Gifts of Crypto are treated like stocks
Generally, giving or receiving cryptocurrency as a gift is non-taxable. As IRS states, “a taxable gift is any property transferred for less than adequate and full consideration.” If you give a gift of crypto valuing up to $15,000, you don’t have to pay taxes, but if it exceeds $15,000 per recipient, you are legally obliged to file a tax return.
File your Cryptocurrency Taxes
Failure to report income from cryptocurrencies could result in penalties and additional interest on unpaid taxes. To avoid this, please consult with a tax-planning professional or best accounting firms in Dubai regarding your cryptocurrency and obligations.
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