Cryptocurrency Tax

The cryptocurrency tax is on the Internal Revenue Service’s (IRS) radar now more than ever. The ballooning cryptocurrency market is the main reason leading to this attention. Importantly though, the recognition happened because the law treats trading in cryptocurrencies as a taxable action. Moreover, the federal agency is concerned that converting fiat to digital currencies is now a major avenue for money laundering. As such, it is only natural for the federal agency to provide an overseer’s role.

The focus has given birth to a chain of guidance and regulation from the IRS. These directives and taxation requirements cover the sale, purchase and in certain instances, the trade in cryptocurrencies. Despite the precepts, there are also a few grey areas.

Tax Burden on Sale and Purchase of Cryptocurrency

The tax framework in place now, the IRS Virtual Currency Guidance, was first posted in March 2014. In it, the federal agency defines the position of the US government regarding the taxation of cryptocurrencies. The announcement describes a virtual currency as a property for the purposes of US federal tax. Essentially, this means that general tax principles applying to property in US soil or jurisdiction also apply to transactions that involve virtual currency.

After publication of the notice, the IRS began treating gains from cryptocurrency transactions as a capital asset. This opened such gains to either ordinary income taxes for short-term deals and capital gains tax in cases where individuals held the currencies for more than one year.

It is emerging, however, that treating Bitcoin and other virtual currencies as property rather than currency is the federal agency’s shortcut to gaining a grip on the industry. It is easier to impose significant taxes on cryptocurrency transactions and introduce record-keeping regulations if the IRS classifies altcoins as property.

Levies on Returns from Cryptocurrency Mining

The notice referred to above also spells out the tax burden every taxpayer should shoulder whenever they receive a block reward for mining a block into the blockchain. The IRS determines this taxable income due to a miner using fair market value (FMV). The amount is often the US dollars equivalent of the coin in question.

The tax obligation does, however, vary depending on the nature of mining. Individuals that mine cryptocurrency as a business are liable to bigger tax burdens; often the FVM of the cryptocurrency they mine less any qualifying expenses. Individuals who mine as a hobby only pay ordinary tax on whatever income they make, usually as a subject of the marginal rate.

The Grey Areas

As earlier mentioned, the tax regulations aren’t watertight yet. Some of the areas that remain hazy include the tax-free exchange of altcoins. Furthermore, the IRS guidelines are hardly crisp on the comparison of the various altcoins. Essentially, this means that it still isn’t clear if some cryptocurrencies may qualify for tax-free exchanges where others wouldn’t.

Based on this narrative, individuals need to pay closer attention to their cryptocurrency transactions and how they report them. In a space where only a handful of crypto holders are reporting their gains, the IRS is right to suspect that individuals are evading tax by keeping their cryptocurrency transactions a secret. Luckily, there are skilled and experienced cryptocurrency tax experts that can help individuals that want to do things the right way.

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