By Jack Belo, Associate
Over the last decade, Cryptocurrencies’ popularity has soared! It is no surprise that it has sparked much debate since being launched in 2009. Numerous types of cryptocurrencies have been created since the arrival and popularity of the first Cryptocurrency, Bitcoin. Despite the spike in popularity, there is still much to learn as to how these currencies should be tracked, treated and taxed.
What is it?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. This type of currency is not issued by a governing authority, unlike the US dollar. Therefore, it is not something that can be controlled by a single country, state or other jurisdiction.
How is it Tracked?
How do you manage and regulate something you cannot see? For the IRS, tracking these types of currencies have become an issue. Cryptocurrencies are managed from a decentralized control, meaning it is hard to track when these currencies change hands. One of the main platforms for buying, selling and trading virtual currencies is a site called Coinbase. Neither the taxpayer nor the IRS receives a 1099 for a given year unless certain thresholds are met. Coinbase will provide the taxpayer and IRS with a 1099-K, only if they have $20,000 or more in cash sales related to 200 or more transactions. As a result, there could be millions of dollars or more in cryptocurrencies that have not been reported to the IRS. As auditing transaction logs of crypto transactions becomes more feasible, the IRS will undoubtedly uncover many taxpayers who have tried to hide their gains and this will most likely lead to penalties.
What are the Tax Implications?
Most individuals think of Bitcoin as an additional form of cash. However, the IRS treats it as Convertible Virtual Currency (CVC). Unlike traditional currency, the IRS treats CVCs as property, such as stock, bonds or investment property. This means sales of cryptocurrencies result in capital gains and capital losses. As mentioned above, the IRS will eventually catch up to particular individuals that have attempted to hide their gains by not reporting them.
Avoid potential trouble with the IRS by taking these necessary precautions:
Track Your Activity
Keeping detailed records of crypto transactions is the best way to avoid any trouble with Cryptocurrency. It is important to know the date of the transaction and the value of the currency in order to compute and report gains correctly. Certain apps like Blockfolio and Delta can help assist with reporting.
Report Your Gains and Losses
The most important takeaway: all gains and losses should be reported to the IRS. Just because they are unaware of gains and losses from the past, does not mean they will never find them. As a result of tax cuts taking place in the 2018 taxable year, the IRS will be looking for more places to generate revenue. Cryptocurrency will continue to be an area of focus for the IRS as more unreported income is discovered.