Bitcoin had an excellent performance last year, the cryptocurrency seamlessly made new highs almost on a weekly basis. However, cryptocurrency enthusiasts have been dancing to an entirely different crypto tune this year.
The U.S tax authorities will no longer tolerate crypto-tax evasion. Henceforth, every bitcoin and other cryptocurrencies transaction will be taxed by the United States Internal Revenue Service.(IRS).
In essence, the IRS will tax all transactions related to mining, spending, trading, exchanging and airdropping of cryptocurrencies.
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 and the IRS is more considerate with those who come forward with their taxes voluntarily than those who wait to be caught evading taxes and will now be forced to pay more through penalties.
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 IRS has not provided enough guidance as regards Bitcoin taxation, the tax authorities treat 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.
With the current look of things, some of the most common cryptocurrency transactions that will be readily taxed by the IRS include:
-Crypto Trading: traders will either gain or lose, but losses offset gains and reduce tax
-Exchanging: when cryptocurrencies are traded, for example when Bitcoin is used to buy other cryptocurrencies it is seen as a taxable event. It is treated as a buy and sell game therefore, gains or losses are made.
-Getting Paid in Cryptocurrency: This activity is treated as ordinary income at the fair market price of the virtual currency when it was received
-Spending Crypto: is another tax event and may generate long or short-term gains or losses. For instance, if a person bought one crypto for $100 if that same coin later appreciates in value and becomes $200 and you purchased something with it, there is a $100 taxable gain. Depending on the holding period it could be a short or long-term gain, and their rate varies.
-Converting Cryptocurrency to Fiat: this activity is also treated as a taxable one since it generates capital gains.
-Air Drops: these are treated as ordinary income on the day it occurs. The coins price on that day is what will be used to do tax calculations when it’s sold or exchanged.
-Crypto Mining: It’s also treated like ordinary income same with the fair market value of the coin on the day it was mined.
-Initial Coin Offerings: ICOs are also taxable activities.
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.
Cryptocurrency exchanges have started putting tax reporting into considerations. For example, Coinbase now gives some business users the form 1099-K which is a payment card used to report payment received and third party Network transactions. GDAX users who have also received at least $20K cash for cryptocurrency related sales for at least 200 transactions in a calendar year.
It is important to pay your tax and avoid being penalized by the law.
