The adoption of the Bitcoin currency by El Salvador might not be a legal tender or a watershed moment for cryptocurrencies, although, in the United States, despite using crypto to buy and sell products or services, you cannot make it “just like cash.” At least not if you wish to avoid any form of trouble with the IRS.
As we are well aware, all virtual currencies are taxed just like a property, or even as an investment whole sold. Long story short – the act of using these currencies to buy anything is similar to selling.
In case you are paid in any cryptocurrency, be mindful that it could be treated as a taxable income. So much so that, almost all transactions could be taxable that should be reported.
Cryptocurrency And Taxes
Although Bitcoin along with the other cryptocurrencies is virtual, they are capable of very real-world tax consequences. This means, if you fail to pay the cryptocurrency tax you owe, you are capable of being subjected to interest and penalties and/or circumstances (including criminal prosecution).
As for the stats, if you couldn’t resist riding on the “Bitcoin’s wild ride” – it rose for up to 437% in the past year with at a point, trading north of $60,000 in April with a drop of below $43,000 in a week. A word of caution, keep good records since you would be responsible for preserving documentation for all transactions.
Crypto and Taxes: Do The Transactions Get Reported To The IRS?
There is no legally required third party that must report the crypto trades or the types of crypto payments. However, with the changing time, it is only fair to say that it could soon change, if and how the Jobs Act and Infrastructure Investment is enacted.
If enacted, then the exchanges would be expected to report for any trade. The bill, as of now, is passed to the Senate and is awaiting the vote this month. Meanwhile, especially if the bill ends up not getting enacted, there would be multiple ways for the IRS to assess whether or not you’ve engaged in any form of taxable transactions of crypto.
Let’s understand with an example:
Any business that is paying anything more than $600 to a non-employee or is paying wages to an employee, even that must be reported to the IRS.
Adding on, every federal tax filer for over the 1040 form, must make sure to truthfully answer the questions concerning the receiving, selling, sending, exchanging, and acquiring any financial interest in any virtual currency during the tax year.
Having said that, this doesn’t mean that the IRS will simply rely on an honor system. Together with the US Department of Justice, the tax agency will be actively seeking compliance in many ways.
The Virtual Compliance Campaign
As for the records, the tax agency has already started a “virtual currency compliance campaign” which includes public outreach, as well as, examinations that are capable of audits.
Additionally, the IRS also sent letters in the year 2019 to about 10,000 people, alerting them on their tax obligations of virtual currencies. This was initiated to urge them to review and amend the past returns if they owe taxes, penalties, and interest. Also, they seek customer lists from cryptocurrency companies via legal summonses.
What Taxes Does One Owe On Cryptocurrency, If Sold?
One must make sure to report any form of capital gain or loss produced from the sale of cryptocurrencies. This will help determine the difference between the US dollars and how much was paid while buying, receiving, and selling.
If the investment was held for a year or less, then it had appreciated in value by the time it was sold, therefore your gain is taxed as ordinary income. On the other hand, if the investment was held for a longer period, that is for more than a year, then it would be subject to capital gains tax rates.
On the contrary, if the money was lost on the sale, you may incur a capital loss to offset the capital gains in other investments.
We hope that this article has helped you gain knowledge on Crypto tax and its consequences. The bottom line of it all is to be very careful with Bitcoin and other virtual currencies with great knowledge and understanding to be on the “good side” of it all.
FAQs: Cryptocurrency Tax: Here’s What You Need To Know
1) Do I have to pay taxes for virtual currencies?
Yes! Cryptocurrency is considered a “property” in the eyes of federal income tax purposes. This means that the IRS will treat it as a capital asset for which there are payable crypto taxes that you might owe when realizing a gain or loss on selling or exchanging a capital asset.
2) How is any virtual currency treated for tax?
Any transaction via a virtual currency is taxable under the eye of the law, just like for any other property. Therefore, the transaction may have to be reported to the IRS.
3) What qualifies as a virtual currency?
A virtual currency is a digital representation of value that only exists in electronic form. Their transactions occur via online networks or the Internet only. For instance, tokens and cryptocurrencies.