The explosion of virtual currencies in 2017 is still fresh in our minds. Ever since even until now many countries are now showing so much interest in this new way of storing value. Governments of different nations are taking the issue of regulation seriously more than ever before.
Over the previous few years into 2019, cryptocurrencies such as Bitcoin have grown in popularity. This increased popularity leads to more attention being paid to the asset by governments making them ask questions on how tax implementation will be administered. Bitcoin tax and cryptocurrency taxes fill the air in various reports.
The Crypto Tax News
According to the first and only formal the United States’ IRS (Internal Revenue Service), guidelines published in 2014, Bitcoin and other cryptocurrencies should be handled as properties and not as currency for tax administration. This applies to all cryptocurrencies like Ethereum, Litecoin, Ripple, and so on.
This implies cryptos must be regarded as owning other types of property such as stocks, gold, or immovable property. This means you will have to give an account of your capital gains and losses from cryptocurrency income, similar practice in stock trading. In the eyes of the IRS, failure to do so is regarded as tax fraud.
Taxes on cryptocurrency are one of the topics on the front row of regulatory authorities all over the world. In the US, the warning is raging. The IRS has been on the move to distribute more than 10,000 letters to crypto investors warning them of harsh penalties if the revenue is not provided and the taxes were not paid.
The service sent out three variants of the letter, depending on the recipient’s data, the Wall Street Journal revealed. One version mandates recipients to sign a declaration stating that they comply with tax regulations that treat cryptocurrencies such as Bitcoin as stock or actual estate-like investment assets.
“Taxpayers must take very seriously these letters. The IRS is expanding virtual currency efforts, including improved use of data analytics,” Chuck Rettig, IRS commissioner, said.
The list of names probably comes from a database of 13,000 account holders who between 2013 and 2015 purchased, sold, sent or got virtual currency valued $20,000 or more.
Coinbase, a digital exchange, informed the IRS by providing the database through a federal court order in March 2018. Although the IRS may have declined to disclose whether the recipients arose from data acquired from Coinbase, the company has earlier stated its conviction that few investors in cryptocurrency appear to be paying sales taxes.
Tax lawyers informed customers that they should take seriously threats to bust digital currency owners for tax evasion. This is because of a similar case that came down with hefty consequences on offenders.
Since 2009, more than $11 billion have been paid by the Americans to solve tax problems since 2009. The estimated number of people was over 56,000 and these are the people who have hidden cash in offshore accounts.
The fact is, both the tax experts and investors are yet to fully understand how to go about the taxation problem.
William Perez, an accountant related to taxes at Visor’s internet tax filing and advisory service, informed the Guardian that he had found that accountants are often reluctant to learn about crypto-accounting rulings.
The same goes for crypto investors: “I see opposition among crypto-investors to report it,” he claims. “Then there’s another group that has Coinbase’s 1099 tax form but they don’t understand what it implies.”
The chief of the criminal investigation, Don Fort informed the IRS intends to tackle cryptocurrency-related tax evasion instances.
Following a June session of the International Joint Chiefs of Global Tax Enforcement (J5), Fort advised that the J5 group had “discovered innovative methods to address these issues, remove obstacles, and create procedures” to address crypto crime.
“Being a tax criminal on the run is not a good one,” added Fort.
Everything at the moment points to the fact that the government is not looking away from the gains of cryptocurrency.
How to Know What is Owed?
This is where things start to look a bit confusing for many people. The calculation may not be as straightforward as the normal taxes people pay for their income.
It’s a bit complex to determine how much revenue you’ve earned and how much tax you’re responsible for when dealing with cryptocurrency. However, some guidelines can help with the calculation. There are taxable and non-taxable cases.
Taxable Cryptocurrency Events
A taxable event is a particular action that causes a liability for tax reporting. In other words, if one of these events occurs, you cause a capital profit or capital loss to be reported on your tax return. It’s as easy as that.
The following was taken as to what is deemed a taxable event in the crypto globe from the formal 2014 IRS guidance. If you are covered by any of the following situations, you are required to go for tax clarification on Bitcoins.
- Trading cryptocurrency to fiat currency such as the U.S. dollar is a taxable event;
- Trading cryptocurrency to cryptocurrency is a taxable event;
- Using cryptocurrency for products and services is a taxable event.
Non-Taxable Cryptocurrency Event
- Gifting one with cryptocurrency is not a taxable event;
- Transferring is not a taxable event.
Generally, the base cost is universal to all taxable events. You must know how to do the proper calculation. The first step is to determine your holdings’ price.
Base Cost is essentially how much cash you spend on buying your real estate. This comprises the price of purchase and other costs related to the purchase of the cryptocurrency for crypto-assets.
Typically, other expenses comprise of the transaction fees and brokerage commissions from the exchanges from which you buy crypto. So to calculate your cost base, the following guidelines should be followed:
Purchase Price of Crypto + Other Fees divided by Quantity of Holding = Base Cost
For instance, if you invested $1,000 in November 2017 in Litecoin, it could cost you about 10.2 Litecoin. Not only that, but a 1.49 percent transaction fee on the purchase on Binance was also paid. Your cost base would be calculated as such: ($1,000.00 + 1.49%* 1000)/10.2= $99.50 per Litecoin.
First, determine the base cost.
Secondly, Subtract Fair Market Value from the Cost Base.
The second phase in determining your capital profit or loss is to deduct the cost base from your cryptocurrency’s selling price. Also frequently described as fair market value is the selling price. The equation below demonstrates how your capital gain or loss can be achieved.
Fair Market Value-Cost Base=Capital Gain / Loss.
As an instance, let’s say you were selling precisely one Litecoin a month ago because the price rose to $200/coin. It is deemed a taxable event (trading crypto to FIAT currency).
$200 is the US Dollar Fair Market Value at the moment of trading. $99.50 is your asset base cost.
You would calculate the profit as follows: $200–99.50= $100.50 Capital Gain.
Then you owe the government a proportion of this $100.50 benefit on your income.
Following normal tax regulations, one will need to understand the base cost of the Bitcoin they sell when cashing out digital currency for fiat. The investment duration also has a significant impact on the tax calculations:
Short-Term vs. Long-Term Capital Gains
The actual rate for capital gains tax is one thing that is yet to be discussed. That’s because some variables depend on this. The first factor is whether a short-term or long-term gain will be regarded as the capital gain.
The short-term capital gain is the cryptocurrency world’s most common rate when you hold a cryptocurrency for less than a year and sell the cryptocurrency more than the base cost.
You calculate short-term taxes on capital gains at your marginal tax rate. To show how to navigate the marginal tax brackets, assume you are a single filer.
During the tax year, you made $82,000, and six months ago you bought Bitcoin for $5,000, including charges and commissions. You sold the Bitcoin for $6,000 later, a $1,000 profit.
The $1000 is raising your revenue for the year to $83,000. The first $500 of your profit is taxed at the price of 22 percent, producing $110 in taxes, depending on the marginal tax table.
A 24% tax will be imposed on the remaining $500 because it exceeds the limit of $82,500. This produces taxes of $120. In total, the capital gain of $1000 for the year would produce $230 in taxes. This is the sum you owe the state.
Long-term capital gains: You are eligible for a lowered long-term capital gains rate if you kept your cryptocurrency for a year or more. the long-term rate is smaller in most cases for different countries and benefits investors if they hold for a year or more continually.
For example, if a Bitcoin is bought at $6,000 and three months later it is sold at $8,000, you’re going to pay a short-term capital gains tax (equivalent to one’s income tax) on the $2,000 you’ve earned.
Where the same trade occurred over a timeline of two years, long-term taxes on capital gains corresponding to the money earned and calculated based on the income bracket of the investor.
Cryptocurrency taxes are also incurred on the purchase of a cup of coffee with cryptocurrency. One must understand the Bitcoin’s base price used to purchase the coffee, and then subtract it from the coffee’s cost.
Selling one’s cryptocurrencies that are mined rather than those they earlier purchased with fiat is another story. Because they receive dollars in return for mining inputs which can only be characterized as a job (and indeed with the word “Proof of Work”), the profit from the sale of mined virtual currencies is taxed as company revenue.
When extracting cryptocurrency, two distinct taxable occurrences will occur if that’s what you do. The first is the revenue from the extracted values in dollars, and the second is the capital gain or loss you incur when selling or trading your mined coins.
Depending on whether you extracted it as a business entity or an interest, you report this revenue differently.
One can also deduct the costs, such as Computer hardware and electricity, which goes into the mining project.
Cryptocurrencies exchange also exposes participants to taxes. If you buy Ethereum with Bitcoin, you’ll need to report the difference in the price of Bitcoin between when you purchased it and when you spent it on Ethereum, plus take into account the Ethereum cost upon buying it later.
Many exchanges assist crypto traders to organize all this information by providing trading data for free that can be used by a tax accountant to determine their tax valuation. Blockchain systems are also suitable for recording this information and highlighting appropriate tax interest points.
Platforms such as TrustVerse have smart-contract-based asset management solutions that organize on the blockchain one’s digital identity and assets to guarantee that tax and property commitments are resolved with precision.
When trying to file crypto taxes for the first time, it is always suggested to go to an accredited accountant.
To sum up, develop a record-keeping arrangement for all your operations and maintain track of when you purchase and have Bitcoin at your disposal.
Keeping thorough the virtual currency transaction records guarantees that revenue is correctly measured. “The main thing is to keep documents that are significantly comparable to inventory,” says Jason Tyra, a Texas-based certified accountant specializing in Bitcoin.
“Incomplete documents may not be records.” Casual Bitcoin users might have thought of utilizing a reputable wallet supplier for their Bitcoin. Wallet suppliers have introduced risk mitigation instruments to increase the security and user-friendliness of purchasing, trading and selling Bitcoin.
In addition to tax factors, investors should look at wallet suppliers or licensed investment vehicles with the kind of safety characteristics that a banking institution might expect.
Some platforms offer to “insure holdings or store off-line holdings in a vault,” says the founder of Digital Currency Council, David Berger. You should be good with every issue of Bitcoin and taxes or crypto tax when you follow the rules as outlined.
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