The US considers cryptocurrencies as “property” not “currency” and as such are to be filed under capital gains tax.
Cryptocurrencies are here to stay, thanks to mainstream investors buying in, and more importantly cashing out. Citizens of the United States who choose to buy should be aware that all earnings derived from cryptocurrencies are considered taxable under U.S. law.
It is always best to consult a certified financial advisor as existing tax laws, and how they pertain to cryptocurrencies like Bitcoin, are unclear and may be particularly confusing to novices. This article shares a general perspective on the matter for anyone who is considering digital assets as part of their financial portfolio and is liable under US tax code.
The Internal Revenue Service states that cryptocurrencies are taxable by law. Once cryptocurrencies became popular in 2014, the IRS issued its first and only guidance report on how tax principles apply to transactions using cryptocurrency. Sarah-Jane Morin, an attorney in the tax practice group at Morgan Lewis explains this announcement, “isn’t as binding as regulations, but it is all we have to go on.” The guidance report declares that cryptocurrencies should be treated as property, not currency, when filing taxes. “Some people with Bitcoin may think of it as dollars or cash, but for IRS purposes it should be treated as a house, stocks, bonds,” says Morin. “You have to look at the general tax principles that apply to property and how it impacts your gains and losses.”
In the United States, property is taxed as capital assets. Therefore, gains from selling or using cryptocurrencies to purchase goods or services are subject to existing capital gains tax and reporting standards. Earning cryptocurrency from mining is also considered a taxable event. As a general rule, payments above USD 600 worth of cryptocurrencies are required to be filed.
Typically, your bank or brokerage firm will send you a 1099 tax form for the sales of stocks or bonds. In the case of cryptocurrencies, many exchange platforms only issue statements if significant gains have been accrued. Coinbase, a well-known crypto exchange platform, issues the statement once USD 20,000 is realised in gains and at least 20 transactions have taken place.
Because the high bar is designed for major investors, it’s safe to say that your casual cryptocurrency investor will not have significant tax obligations. That said, it is recommended to report any and all gains or losses to avoid potential IRS penalties and fines.
Since the IRS categorises cryptocurrencies as property, you need to pay taxes if you have accrued significant gains, or lower your tax bill if you have taken a loss.
Having the following information to hand will be vital when filling out the tax form:
When you bought the cryptocurrency
How much you paid for it
When you sold it
What you received for it
This is called tracking your basis. Usually the basis is just the purchase price, but it is adjusted for splits, dividends, and return of capital distributions. The basis is necessary for determining the capital gain, or the difference between the asset’s cost basis and the current market value. It is important to keep up with all purchases and sales in a timely manner as it can get confusing down the road. This task can be aided by traditional book keeping or with the use of portfolio management solutions.
There are a few websites geared towards helping cryptocurrency investors determine their tax liabilities. Bitcoin.tax and Cointracking.info assists you in figuring out your transaction history, how much you owe, and how to fill out the Schedule D (1040) form for reporting capital gains and losses.
Although it may seem like no one is reporting your capital gains to the IRS, it is never a good idea to try and hide it. In the future, the agency may discover that you owe back taxes and has the authority to impose strict penalties and fines. “The best way to avoid penalties is to do the best you can with reporting,” says Morin. This will at least show the IRS that there was no wilful intent to avoid taxes. In a statement released by the IRS in March, “taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions.” These penalties can mean serious business: someone convicted of tax evasion is subject to a prison term of up to 5 years and a fine of up to USD 250,000.
It is important to keep a log of all of your transactions ahead of annual tax filings. In addition to keeping updated records, it is advisable to set aside money each time you make a taxable trade to compensate for the tax associated with the transaction. As previously stated, reporting your tax obligations is your responsibility and you alone bear the consequences of failing to do so.
Though the current lack of clarity surrounding taxation of cryptocurrencies may confuse novices, the U.S. Securities and Exchange Commission is taking steps to build upon the 2014 IRS statement on virtual currencies being considered property. Earlier this summer, the S.E.C. named Valerie A. Szczepanik as Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation. This newly created advisory role of “Crypto Czar” is tasked with coordinating efforts across all SEC divisions and offices regarding the application of U.S. securities laws to emerging digital asset technologies and innovations, including initial coin offerings and cryptocurrencies. It is likely that greater clarity will be provided as the current Administration moves to simplify the complex U.S. tax code.
Disclaimer: Copper Financial does not provide tax, legal or accounting services. This article has been prepared as informational content only, and is not intended to provide, and should not be relied on for tax, legal or accounting purposes. For appropriate advice please consult certified tax, legal and/or accounting advisors before engaging in any transaction.
Our settlements and clearing service is backed by our award winning custody technology
The latest forward thinking research, straight to your inbox.