Bitcoin had a sterling performance in 2017, as the cryptocurrency effortlessly made new highs almost on a weekly basis. However, cryptocurrency enthusiasts have been dancing to an entirely different crypto tune this year. Specifically, the U.S tax authorities will no longer tolerate crypto-tax evasion. Henceforth, every bitcoin and other crypto transaction will be taxed by the United States Internal Revenue Service (IRS).
All Activities Eligible
The IRS has got its knives all sharpened and is set to start cutting its share from the crypto cake. Digital currency investors need to be prepared for the task ahead instead of being reactionary since obedience is better than sacrifice. The government body is more considerate with those who come forward with their taxes voluntarily than those who wait to be caught evading taxes and then forced to pay more through penalties.
In essence, the IRS will tax all transactions related to mining, spending, trading, exchanging and airdropping of cryptocurrencies.
With only a handful of crypto investors remitting their crypto taxes since Bitcoin’s launch, the IRS suspects that many virtual currency investors have been evading taxes. Although the state authority has not provided enough guidance regarding Bitcoin taxation, authorities are treating virtual currencies as property for tax purposes. Therefore, all activities like selling, spending and even exchanging one crypto for another, receiving crypto as compensation and all other digital currency related activities all likely have capital gain implications.
Most Common Taxable Crypto Activities
Crypto trading attracts taxes. Traders will either gain or lose, but losses offset gains and reduce tax. Exchanging cryptocurrencies is an operation of great interest to the IRS. For example, when bitcoin is used to buy other cryptocurrencies it is treated as a taxable event. Getting paid in cryptocurrency is also treated as ordinary income based on the market price of the virtual currency when it was received.
When you spend virtual currencies, the IRS gets another share since you might have made long or short-term gains or losses from your holding. For instance, if a person bought one coin for $100 and that same currency later appreciates in value and becomes $200, and then you purchased something with this appreciation, there is a $100 taxable gain. Depending on the holding period it could be a short or long-term gain, and thus their rates vary.
Converting cryptocurrency to fiat will also attract the IRS since it can be a capital generating activity. When there’s an AirDrop after a hard fork or any other kind of airdrop, the tax authorities handle it as an ordinary income on the day it occurs. The price of the digital asset on that day is what will be used to do tax calculations when it’s sold or exchanged.
Crypto Miners are not left out. Mining operations are taxed as traditional income same with the fair market value of the Blockchain money on the day it was mined.
In line with the above, it is quite advisable to buy and hold cryptocurrency for more than a year because short-term gains are taxed at your regular ordinary income tax rate while long-term gains are taxed at a reduced rate of 15 to 23.8 percent depending on the individual bracket.
Lastly, cryptocurrency exchanges have started making tax reporting a higher priority. For example, Coinbase now gives some business users the form 1099-K, which is a document used to communicate payment received and third party network transactions. GDAX users are also taxed if the earned at least $20,000 in cryptocurrency related sales for at least 200 operations in a calendar year. Other users are expected to use their transaction history to calculate their taxes.
Many crypto enthusiasts have used services like Bitcoin.tax and cointracking.info which collates their trading history and comes up with a clean output for tax return. Ultimately, be patriotic, Pay your taxes.