Vast numbers of people made a lot of money when the value of Bitcoin first exploded. As there was a wild rush of excitement about BTC and the increase in value, not many investors thought of their tax on cryptocurrency.
This has significant implications and not only with BTC, all alternative coins investors have bought in to, should be reported to the IRS.
This isn’t merely from cashing out any coins, it includes any trading, mining, spending or many other areas where these cryptos are used.
BTC Tax in 2018
There is such a tremendous amount of money at stake, there is no way the IRS will leave it to pass by. It might take them a while to catch up with everyone who they see as owing to this crypto tax.
The IRS might have an ally, though through the nature of how BTC works it might not be that easy. The blockchain technology records all transactions, and if the IRS can tie any of these to individuals, they have a permanent record of their dealings.
Another area where the IRS can target to find individuals who owe cryptocurrency tax are the exchanges. Many of these have details of the user accounts and have already pressured some exchanges to hand over these details.
What is Taxable?
As of yet, there is still an unclear line of what it, and what isn’t taxable. The IRS doesn’t look at BTC or any other altcoins as currency. The IRS state these coins are property regarding tax liabilities.
What this means to investors is, capital gains tax cryptocurrency implications will come into play when any transactions or cashing out is made.
Crypto Tax Implications
Here are the implications of any cryptocurrency when used:
Trading Cryptocurrencies – this will produce capital gains or any losses. If the latter is true, these losses can be offset and reduce overall taxation.
Receiving Crypto Payments – this can be either exchange for products, services or as salary and are treated as regular income. If this happens, they are taken at the fair market value of the cryptocurrency when they were received.
Spending Crypto – this another one which could generate capital gains or losses and can be short-term or long-term. As a quick example, if you bought a coin for $200, and then it was valued at $200.
If you purchased a gift card for $400, you then have a $200 gain which is taxable. Rates will vary if you hold it long-term or short-term.
Exchanging Your Crypto – if you used one crypto coin to purchase another currency, this creates an event which is taxable. Doing this, the coin you have used is deemed as being sold and leads to capital gains or losses.
Cashing in your Crypto – when you cash in any coin to any currency at a profit, this also creates a taxable event and is also treated as being sold, again, you create capital gains, or losses if you sold it for less.
ICO (Initial Coin Offerings) – these don’t fall under any IRS tax-free exemptions for raising capital. As this is the case, they are deemed regular income to both individuals and businesses.
Crypto Mining – anything which is earned by the mining of coins is deemed as regular income, so the cryptocurrency and taxes are calculated at fair market value for the day the coin was mined.
Air Drops – these are looked at in the same way as mining and are classed as income until they are sold. At this point, they become eligible for capital gains.
Hold Your Crypto’s
As wallets are not set-up to decide which coins you wish to exchange or sell. The IRS would use a FIFO (First-In-First-Out) to make any calculations.
Investors (taxpayers) can choose their methodology as long as they use this throughout the return.
With all this in mind, it is advisable for anyone who is holding a cryptocurrency to do so for over 12 months. With this, you can pay a reduced amount of tax (depending on your tax bracket).
This being said, if you are still in profit with your coins, it might be wise to cash in and take the hit on tax. This choice though is dependent on you and your circumstances.
It’s pointless holding for another 12 months if the value of your cryptocurrencies is going to fall.
What happens now?
Exchanges are now making steps toward tax reporting. A good example being Coinbase. All this relates to sales value and number of sales per year.
There are two ways to look at it, you ignore it, or you begin preparing for it and weigh up your options of what you stand to lose compared what you stand to gain.