Bitcoin and Cryptocurrency Taxation
One of the new investment options nowadays, are Bitcoin or Cryptocurrency. It surely has found its place in the investment world and have caught the eyes of many investors; more specifically Millennials. Cryptocurrencies are technology-driven by their nature; so the IRS and the taxing authorities are catching up to the fast evolving market.
In 2014, the IRS released partial guidance, and took position on Cryptocurrency. It stated that for Federal tax purposes, virtual currencies are treated as properties; and that same tax principles that apply to property, would apply to Cryptocurrency. In my opinion, this is a simplistic yet effective way to mitigate an issue that is still evolving to this day.
In order to determine your tax liability with regards to your Cryptocurrency; and keep track of your transactions, you will need the following information:
1. Purchase date
2. Purchase amount
3. Sale date
4. Sale amount
People can own Cryptocurrencies through:
· Sale of goods or services
So, to put this in perspective; a tax payer who receives virtual currency as a payment for goods or services; they must report this as income and include the Fair Market Value (FMV) of the virtual currency measured in U.S. Dollars, at the date the virtual currency was received.
Same general principles apply when Cryptocurrency is purchased. It is recorded at cost, and tax is paid upon the disposition of the Cryptocurrency. The way tax is calculated in this case is simple; as if you are calculating gain/loss on disposing a typical asset:
· Gain is reported if Fair Market Value > Adjusted Basis
· Loss is reported if Fair Market Value < Adjusted Basis
Keeping in mind that, reporting gain/loss on Cryptocurrency is completely your responsibility. Brokerage firms who typically send you 1099 tax form for your Stocks/Bonds sale over the year, will probably not do the same when it comes to the sale of Bitcoin or other Cryptocurrency.
All these simple yet important steps; help you decide whether Cryptocurrency/Bitcoin is the right investment for you. This is an evolving technology, and the Internal Revenue Service and other taxing authorities are yet to catch up with this changing environment. So it is safe to assume that further guidance from the IRS will be published in the future.