Some think investing in cryptocurrency will allow them to evade taxes, but that is not the actual situation. Although cryptocurrency trade began as far back as 2009, it was not until 2014 when it traded in volumes that attracted the attention of IRS and other regulatory agencies. After the 2014 and 2017 boom in the cryptocurrency trade, the IRS has been designing ways of regulating the business. It has also been providing guidelines on how it defines and taxes cryptocurrency.

The first cryptocurrency tax guidelines release was in October 2019. Here is some basic information you need to know before you begin trading in the currency.

Tax Implications

When it comes to federal income tax, cryptocurrency is treated as property as though it were your house. The gain or loss in this currency thus depends on how the taxpayer views it. That is whether it is a capital asset to the taxpayer or not, as per the IRS. If the currency is held as an investment, it will be taxed at capital gains rates. If it is held as an inventory, it will be taxed at ordinary income tax rates.

At the same time, what you disclose to the IRS and when the tax is due will depend on what you are doing with the currency. If you carry out activities like rollovers, sales, transfer exchanges, and any other activity, you are supposed to seek guidance from your tax advisor so that the expert can assess your liability.

The expert will also help you in completing the correct forms depending on your activities. Whether you are using the currency as real estate, the expert will help you understand the different forms involved and how to complete them appropriately.

Like trading in cryptocurrency, every other activity you do and every form of income has its form to complete for your tax returns. Here are some facts about tax that may be of interest to you.

  1. You may incur some losses or gains through the sale, exchange, or purchase of tokens. Therefore, if you make any gains on tokens or make losses, it is essential to disclose that information to the IRS.

 

  1. Mining is part of ordinary income when it comes to filing tax returns. You can gain cryptocurrency through mining. Your pay in tokens will be taxed as business, self-employment, or even as wage for what you are doing.

 

  1. Forks and airdrops are in their particular classification that requires individual assessment. The tax implemented on forks and airdrops will depend on whether the individual has dominion over a new token after a fork.

 

  1. You need evidence of everything you do for taxation. That means you need to show your tax expert all your records of every activity so that they may know how to prepare the returns appropriately. Some of the activities will have tax forms, but if you do not receive them, you need to record the transaction. You will have to produce that evidence at the time of tax preparation.

 

  1. There is an increased effort by the IRS to enforce taxation. Everyone holding an account has received a letter from the IRS informing them of the need to review their tax returns

All you need to know is that there is a lot when it comes to cryptocurrency and taxation. It is, therefore, prudent to work with a tax expert to help you through the process of filing your returns. It is not easy for a layperson to understand the entire process well.

If you are working with Cryptocurrency or thinking about it and would like to talk to us about it, please contact us at (480) 558 4400