Cryptocurrency has been around for a few years now; long enough that many, many people are taking advantage of the opportunities they provide. Since the Bitcoin hit the market in 2017, there has been growing excitement about the online currency. However, many people don’t realize that cryptocurrency is actually taxed as property according to the US government.
In fact, any form of cryptocurrency exchange, including selling and spending, will likely have capital gains implications; and receiving it will be considered income. There are literally hundreds of cryptocurrencies available, but the bitcoin is currently the most popular, and all types are taxed equally.
Things can get a little bit complicated when it comes to the cryptocurrency taxes, so it’s in your best interest to hire a knowledgeable accountant, especially when doing your business tax filing. Let me lay out a few of the tax implications on certain (and popular) crypto transactions.
1. Receiving Cryptocurrency Payment
If you’re receiving payment for services or goods with cryptocurrency, it’ll just be treated as ordinary income; the same applies if you receive cryptos as salary.
2. Exchanging Cryptocurrency
If you’re exchanging one type of crypto for another it will be considered a taxable event. This is treated as cryptos being sold and will, therefore, generate capital gains or losses. The same can be said for converting cryptocurrencies; let’s say from the US dollar to another form of currency.
3. Sending Cryptocurrency
Sending this form of currency is considered a taxable event and will produce capital gains or losses. Keep in mind too, that this can be short-term or long term. Let’s say you purchase one bitcoin for $100, and over time the coin earns the worth of $200, you could buy a $200 gift card but will then be taxed as a $100 taxable gain. Most likely you or your business will be dealing with much larger sums of money than that; so, don’t forget that cryptocurrency taxes will bite you in the behind if you’re not paying attention.
There are certainly more opportunities available for your cryptocurrency investments, and the details can get complex; it’s best to contact your accountant for those inquiries. Having said that, the smartest way to invest with cryptocurrency is to buy it and hold it for at least a year. Short term gains will be taxed at your regular income tax bracket, but long-term gains will have a reduced rate. It’s up to you whether you decide to wait, or just take the tax hit and the best person to discuss that within your accountant, who will know your individual situation to give you such advice.
Another reason you may want to hire a professional is that digital exchanges are not broker regulated by the IRS, which means you’ll have to self-report which can get very complicated. And it’s always a good idea to get ahead of the IRS, so not reporting should not be an option. It’s been known that government agencies are a lot more lenient on businesses or persons that come forward on their own accord, rather than waiting and hiding from them. It would be a very good idea to save all digital copies of cryptocurrency exchanges in order to have all the proper documentation for the tax reports. Make sure to keep all dates of earning, buying or exchanging coins, market value at that date and sales proceeds when the coin is sold, exchanged or spent. Most cryptocurrency exchanges (like Coinbase or GDAX usually keep records for you, but double-check so you don’t lose any necessary information.
If you find that you and/or your company are trading a lot of coins and often, you may be asked to report quarterly, or even monthly rather than yearly. It’s also possible that you’ll be asked to make estimated tax payments for the current tax year if you expect to owe over $1000 for that current tax year, or if you expect your withholding or refundable credits to be less than, a) 90% of the tax to be shown on your current year’s tax return, or b) 100% of the tax shown on your prior year’s tax return.
Cryptocurrencies can be a smart and attractive investment idea. Whether you’re dealing with personal investments or business transactions, you can benefit from the digital opportunities that have come out of the cryptocurrency world. While the tax regulations may get complex, if you arm yourself with a knowledgeable accountant and prepare all your documentation accordingly, you will be just fine. You may decide to hold your coins to cash in on that tax break, or you may wish to report short term gains; either way, it’s up to you. Stay knowledgeable and current and your investments will benefit you.