The last few months have been a rollercoaster ride for digital currency enthusiasts. In December 2017, after rising to high $19,205, Bitcoin (the world’s most popular cryptocurrency) shed almost half of the value in merely 60 days. In the mid of February 2018, Bitcoin surpassed the past $10,000 price mark. In addition, Ethereum and Litecoin also witnessed the impulsive drops.
Now with this dramatic swing, you should start thinking about the taxes on cryptocurrencies.
So far, the cryptocurrencies universe has evaded the burdensome, the complex customary regulations in most financial markets of the US. However, this situation is expected to be changed in the year 2018, though, after the scrutiny of cryptocurrencies by SEC. In fact, numerous federal and state agencies are concerned for systemic and individual risks posed by the cryptocurrencies. From good outmode fraud to the innovative cybercrimes and distinct possibility, a huge amount of tax revenue has been lost to this dark market till 2013.
Last year, an SEC complaint against Coinbase that revealed around 900 taxpayers gained Bitcoins in between 2012-2015 and over 14,000 users did transactions of $20,000 during the same time period.
When legislators thinking about new rules and regulations that how to apply the existing ones on this revolutionary monarchy, the IRS was very clear on paying the taxes on digital currency. Similar to everything that is connected with the blockchain in the year 2018, the crypto tax law’s branch is also in progress. Therefore, if you are planning to buy and sell Bitcoin(BTC) or other cryptocurrencies, then you must read on the following Frequently Asked Questions (FAQs) on cryptocurrency taxes.
Note: If you are making money from digital currencies overseas, then you might have to pay taxes. Following FAQs applies to the resident aliens and US Citizens.
1. I purchased a few Bitcoin (or other altcoin). Do I need to pay taxes on them?
No, not necessarily. Currently, the IRS seems to respect Bitcoin, Ethereum, Bitcoin Cash, Litecoin, Monero, Ripple, Dash, Zcash and others similar to stock. Therefore, if you have purchased Bitcoin or other altcoin, then no need to pay taxes.
2. If I sell my Bitcoins. Is there any need to describe them on my taxes?
Yes. After you sold them and realize a loss or gain, you have to report the same and pay taxes on the capital gains.
3. What do you mean by capital losses and gains?
It is basically the difference that what the cost of an asset was at the time of purchase and when you sell that asset. If price of that asset increases, then it means capital gain or if the asset price went down, then it means capital loss. The detailed explanation was published by the IRS.
Apart from this, the other thing that you should know is that the IRS has divided capital gains as short or long-term. The users that are associated with the assets for over 365 days will be categorized as long-term capital gains and taxed around 15 percent. The assets that are held for a short span of time are known as short-term gains and they are taxes similar to the income and could be up to 37 percent.
In case, you lost your money on the crypto-shenanigans in the year 2017, then you can include the losses on returns. The IRS has a limit of $3,000 on capital loss deductions each year.
4. How to calculate capital gains and losses on cryptocurrency?
In order to calculate the digital currency capital gains or losses, you need to consider the following details –
• When you purchased the coins
• In how many USD you have purchased the coins
• When you sell the coins
• How much amount you have received for them
The renowned cryptocurrency exchanges might follow a mechanism in order to gather the complete information. Else, if you have complete details, then you need to root via bank, wallet receipts, or email. In addition, you can make use of Google in order to know more options of calculating capital gains or losses.
5. Which form of tax should I use to account cryptocurrencies?
You can use the federal tax form, Schedule D for reporting capital gains.
6. I have made payment through Bitcoin. Should I file it?
Yes. You need to report the earnings on W-2 to the IRS. In case, you have made a compensation with contractors of cryptocurrency, then you need to give 1099 to the contractors.
7. Who can help in figuring out Bitcoin taxes?
If you want to figure out your Bitcoin taxes, you can consult a tax professional. However, the basic code of tax is complex and cryptocurrency activity can quickly get complicated. Hence, whenever you have any doubt, hire a tax pro.
All-in-all, first do proper research and pay your taxes on the cryptocurrency.