Investing in cryptocurrency moved mainstream last year and now more people are staring down tax bills from their big gains.
The only official IRS guidance about the tax consequences of your adventures in the Jurassic jungle of cryptocurrency trading is from 2014. And that four-year-old publication offers mere guidance, rather than strictly controlling rules.
So the best basic advice when you are confronting taxes on cryptocurrency is: “See your tax professional”. But here’s some basic information to help you sleep at night until you can make that appointment.
How does the IRS define cryptocurrency?
The IRS defines cryptocurrency as a “convertible virtual currency,” which either has an equivalent value in standard currency or can be used as a substitute for standard currency.
Here’s the crucial bit of info. The IRS considers cryptocurrency to be investment property, and not a medium of exchange. In other words, cryptocurrency is deemed an asset, just like real estate, stocks, or precious metals. This means that buying cryptocurrency is not a taxable event. You don’t realize a tax obligation until you trade, use, or sell your cryptocurrency. If you’ve purchased bitcoin and haven’t yet sold it, you probably have not yet incurred any reporting obligations.
If you hold your cryptocurrency longer than a year, the long-term capital gain rules apply
This means you pay about half the short-term tax rate.
A key item of information in calculating taxes on the results of cryptocurrency transactions is the dollar value of your cryptocurrency purchase, at the time of purchase. Most cryptocurrency exchanges do not undertake the task of determining the dollar value of your transaction. Whenever you buy cryptocurrency, it’s a very good idea to ascertain and record the then current USD value of your purchase.
The above barely skims the surface of a multitude of gray areas, so, to avoid being bitten by bitcoin, see your tax professional.
Read the full article at: money.cnn.com
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