Paying Taxes on Cryptocurrency

There were many new adopters of various cryptocurrencies in 2017, but a large number of early investors saw an opportunity to buy in and then cash out to make good on their returns. However, this strategy is one that leaves them open to massive tax liabilities — especially since a majority of users aren’t clear about how exactly tax laws apply to virtual currencies.

According to the Internal Revenue Service, virtual currency transactions are taxable under the law. The agency’s only guidance regarding how tax principles apply to cryptocurrency transactions was issued in 2014. It states that for tax purposes, that cryptocurrencies must be treated not as currency, but property. That guidance then includes anything which is considered a “convertible virtual currency,” meaning it has an equivalent value in a tangible currency or can be substituted for these currencies. Although not all cryptocurrencies act in this manner many of the major ones, this is applicable to many of them, such as bitcoin.

In short, if you have bought bitcoin or another cryptocurrency but haven’t sold it, then you haven’t realized any gains, so that means you may not have any reporting obligations. However, if you sell any cryptocurrency you do need to report the gains and losses.

This is done by reporting any gains, but unlike stocks, with cryptocurrency, you don’t receive a 1099 tax form from a brokerage firm and so you have to determine what you’re liable for when it comes to taxes.

The next consideration is that since cryptocurrency is equated to property, although you have to report any gains, you can also save money when you have to report losses. There are three pieces of information that you’ll need and those are:

• When you purchased the cryptocurrency.
• How much you paid for it.
• When you sold it.
• What you received for it.

Even though you may not think of cryptocurrency as being traceable, just because you aren’t working directly with a broker doesn’t mean you can or should hide any trades. Should the IRS discover trades you haven’t reported, then you may be subjected to penalties and fines.

Finally, as with any any investment, you need to be sure and keep track of your gains and losses and maintain up to date records. Not only will this be helpful in determining what cryptocurrencies are the most profitable, but it will also save you time when it comes time to file your taxes.