Crypto trading has hit the mainstream in recent years, and with bitcoin prices currently at a record high of $56k for one bitcoin, many more people will be hoping to make their fortune trading crypto online. However, before you go and open an account on a cryptocurrency exchange, it’s important to consider the potential tax implications. After all, buying cryptocurrency is an investment, so the IRS will want its share when you make a profit.
The IRS is Watching
There was a time when trading in virtual currencies didn’t attract much attention. After all, most people at the Inland Revenue Service would have had no clue what a virtual currency was, let alone how to tax it. However, things have changed and the IRS has caught up with the world of cryptocurrencies.
A recent IRS requirement means banks must notify the IRS when a customer’s cryptocurrency transactions exceed $10,000 in value. This puts cryptocurrencies in line with other fiat currencies like the USD or GBP. If the IRS thinks you may have had cryptocurrency dealings and haven’t declared them in your tax returns to date, you may already have received a letter advising you what to do next.
There is now an updated question on form 1040, page one, to reflect this change of approach to cryptocurrencies. This suggests the IRS is going to start cracking down on cryptocurrency transactions, and if you are a trader or investor, it is a good idea to get your accounts in order soon.
If you have received a letter and you are concerned about possible penalties, it’s advisable to speak to a qualified tax accountant.
How the IRS Taxes Cryptocurrency
Cryptocurrency is treated as an asset, rather like gold or stocks and shares. This has been the case since 2014 when an IRS ruling was made. If you own any bitcoin or a different cryptocurrency, your taxes will be more complex than the average Joe.
In simple terms, when you buy bitcoin (or any cryptocurrency) and it goes up in value, the difference between your original purchase price and today’s value is a capital gain for tax purposes. For example, if you bought one bitcoin a few years ago and paid $2,000 for it, but sold it today for $55k, you will have made a profit of $53k. Even if you used that bitcoin to buy something, the IRS still thinks you have made a capital gain, even if you have no cash in the bank to show for it.
Use Losses to Offset Gains
The good news is that you don’t owe anything if you make a loss on your cryptocurrency activity. In fact, you can use any losses you make trading cryptocurrency to offset your profits from other activities. For example, if you invest in a new cryptocurrency but it is a bust and you lose $10k, you can use this loss to offset the profit you make from selling some shares in a fintech startup.
Gains are taxed depending on whether you have owned the crypto for a year or more.
Take professional advice if you are unsure of your tax position with regard to cryptocurrencies. It’s better to be safe than sorry!