What You Need to Know About the Taxation of Cryptocurrencies

Oct 1, 2021 | Blog

The adoption of bitcoin as legal currency in El Salvador may have been a milestone event for cryptocurrency. However, in the United States, bitcoin and other cyber currencies are not considered the same as cash, even though they are used in a similar way to buy and sell services or products. According to a cryptocurrency tax attorney, treating such “money” as cash can lead to problems with the Internal Revenue Service.

The Confusion Surrounding Cybercurrency

Virtual currency is taxed when it is sold, similar to the way investments and the sale of property are taxed. To further complicate matters, using bitcoin to purchase something falls under the banner of “selling,” according to Uncle Sam. If you receive crypto, such as bitcoin, as payment for something, the IRS regards it as taxable income. For this reason, virtually all transactions should be reported, since there is a good chance they are taxable.

Tax Consequences in the Real World

Even though cryptocurrencies are used in cyberspace as virtual money, the reality is that they are linked to tax consequences of all kinds: failure to pay taxes owed on such currency subjects you to penalties, interest, and even a tax lien, depending on the amount you owe. Even criminal prosecution is a real-world consequence of failing to do proper tax planning and pay what you owe with regard to crypto transactions. For this reason, you should keep accurate records and preserve any and all documents concerning transactions of this kind.

Cyber Currency Transactions Are Reported to the IRS

If you consult tax lawyers, they will almost certainly tell you that even though third-party reporting of cryptocurrency trades is not legally required at this time, this may soon change. If the Infrastructure Investment and Jobs Act is put through, Coinbase and other exchanges would be required to report your trades. The Senate has already passed the bill, and it will be voted on by the House before the end of the month.

In the meantime, however, there are numerous ways the IRS assesses whether or not you’ve engaged in transactions involving taxable cryptocurrency, and therefore it is unwise to assume that such transactions won’t make their way onto its radar.

Understanding What You Owe

It is always wise to consult a crypto attorney to make sure you are on the right path regarding your taxes, but, as a general rule, any capital gain or capital loss from the sale of such currency should be reported. If it was held for 365 days or less and had appreciated in value by the time it was sold, it is taxed at the level of regular income. If, however, it was held longer than that, capital gains tax rates would come into play. If you were paid in virtual currency for services or goods, such currency is reportable as standard income and should be reported at the value it held when it was received. It is typically not necessary to report the purchase of virtual currency, but you should consult an attorney to make sure, since your situation may be unique. You should also check with an attorney to determine laws specific to your state. Finally, if your circumstances are particularly complex, it is in your best interest to consult with a cryptocurrency tax attorney with experience in this area.