People who invest in cryptocurrency already know the benefits of those investments. The overall worth of Bitcoin, among others, tends to go up quite a bit over time, making those investments pay off. The only downside is that those investments are taxed, quite like those made on the standard stock market. In fact, the IRS is adding extra taxes to the list, making it even trickier for people who invest in these currencies to properly do their tax returns. Although getting some assistance from a tax professional is definitely your best bet, so is knowing the ins and outs of cryptocurrency tax laws. Here’s what you need to know.
What Is Cryptocurrency?
Let’s start at the beginning. Cryptocurrency is a form of money that isn’t backed by any particular country or other form of protection. For example, the American dollar used to be backed by the country’s gold stores (this was known as the Gold Standard, for the record), but now it’s backed by the general promise of the United States government. Other counties have some similar measures in place. Cryptocurrency doesn’t have these reassurances. It’s worth what it’s worth, and that price can fluctuate quite a bit.
In addition, cryptocurrency doesn’t have a physical form. Unlike U.S. currency, which consists of paper dollars and metal change, you can’t hold a Bitcoin in your hand. It’s solely a digital entity. In the beginning, those who wanted Bitcoin had to put together a sophisticated computer system that “mined” for the coins by digging through lines of code. Other cryptocurrencies had a similar set up. However, now people can invest, or buy, Bitcoin and other cryptocurrencies without having to do this. They can simply go an exchange and turn over standard U.S. dollars or other funds for cryptocurrency.
Although Bitcoin appeared briefly on the U.S. stock market, for the most part, cryptocurrencies are sold, bought, and traded through exchanges. This can make it tricky for those who invest in them to keep track of every trade that they make, as well as keep a record of things like gains and losses, both of which must be disclosed on a tax return.
Making it even tougher, since these exchanges are located all over the world, the IRS can have a difficult time keeping track of these different cryptocurrencies, their users, and their investors, although they have had some luck in getting foreign banks to release records as of late. This means that even though an investor may think that they are getting away with using a foreign exchange and hiding those assets from the IRS, in most cases, they really are not.
What You Need to Know About Cryptocurrencies and Taxes
When it comes to cryptocurrencies, no matter which kind you invest in, there are a certain number of things that you need know, so you can keep your records in order for tax time. These important aspects include:
- Disclosing Assets Over a Certain Threshold – According to one source, there’s a bill currently circulating in Congress that will require companies to disclose a certain amount of assets help in cryptocurrency on their tax returns. This amount is set at $10,000, so anything held over that amount must be listed in order to remain in compliance.
- Income Taxes Due on Any Gains – Like standard stock market holdings, any gains (money made) on cryptocurrency holdings or trades must be included in income amounts. This means that your cryptocurrency gains may boost you into a different tax bracket, where you will have to pay additional taxes to the IRS on them, much like you would on traditional stocks.
- Using Cryptocurrencies to Buy Things – Not everyone just holds onto their cryptocurrencies, treating them like an investment. Some people use them to purchase specific items from stores or dealerships (like Tesla) that accept them. People who fall into this category need to keep in mind that they will have to pay additional taxes on the cryptocurrency that they spend, based on the amount of its increased value (if any).
- The IRS Now Asks About Cryptocurrencies – When you go to fill out your yearly tax return, there’s one important question that pops up near the beginning of the process. The IRS now asks whether or not you hold, exchange, or invest in any cryptocurrencies, so they know whether or not to make you fill out an additional form in which you declare your holdings, gains, and losses. This is designed to remind people that they need to disclose this information.
A Few Issues That Arise
Although the fact that the IRS is making the process of disclosing cryptocurrency transactions and investments more transparent, there are still a few bumps in the road. At this time, cryptocurrency exchanges aren’t required to send out the same tax forms as standard stock exchanges are. This may change in the future, but it places the onus on the person investing in cryptocurrencies to keep track of their own gains and losses and report them honestly to the IRS which can prove difficult.
In addition, since many of the cryptocurrency exchanges are located in foreign countries, it’s easy for those who invest in Bitcoin and others to think that they may get away with not having to disclose that information to the IRS. They believe that this information will be kept private, like the well-known Swiss bank account. However, this is no longer the case. The IRS has been cracking down on these foreign bank accounts, making it clear that foreign cryptocurrency exchanges are no longer as private as they seem to be.
Plus, the IRS is well aware of the fact that people may be using cryptocurrency exchanges in order to launder money or hide assets from them, so they are looking even more closely at these forms of currency. They have even started tracking the blockchain transactions, going back to the very beginning when those computers used to “mine” the currency in order to ensure that everything is properly disclosed.
What You Can Do
In order to stay in compliance and not run afoul of the law and the IRS, there are a certain number of things that you can do. Since the cryptocurrency exchanges are not required to send out tax forms to investors at this time, until that changes, you are the one who needs to ensure that all of your information is correct. To stay on top of your investments, here’s what you can do:
- Track Your Transactions – There are programs out there that can help you by tracking your cryptocurrency exchange transactions. Every trade that you make will be recorded, along with any gains or losses. This makes it easier to pull up the information that you need when it’s time to fill out your tax return. One such program is called CoinTracker, and it’s designed to not only keep track of this information, but it also pulls up your totals and lists how much you need to disclose to the IRS. There are other programs out there that do the same thing, which makes this part of the process much easier and makes it less likely that you will end up making a crucial error.
- Keep Good Records – If you choose not to use a program to track your transactions, or you actually spend some of your cryptocurrency on certain things at stores that accept it, it’s important to keep very detailed records. You should track not only how much you’re currently holding in cryptocurrency, but also how much you have spent, how much you’ve made, and how many transactions (buying and selling) you’ve completed in the last calendar year. This way, when it’s time to fill out your tax return, you have all of the information that you need on hand. Just take the time to ensure that everything is accurate.
- Seek the Help of a Professional Tax Preparer – When in doubt, or if you’re feeling overwhelmed with everything that cryptocurrency and taxes entail, seek the help of professional tax preparer. By getting ahold of them prior to tax time and hiring them to help, they can make sure that all of your information is in order, whether it involves tracking investments and gains, or making sure that you’re listing the correct values of any amounts of cryptocurrency that you spend. They can take care of all of your other tax-related information as well, so your tax return will contain all of the correct information.
Contact Us Today
If you have invested in cryptocurrency and are worried about having to pay additional taxes or just have questions because you’re considering investing in this new form of currency, then you need the help of a tax professional. Reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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