If you are wading into the waters of cryptocurrency investment, there is something important you need to keep tabs on other than the undulations of your chosen crypto’s value. You need to factor in what your activity in the digital currency market will translate to in terms of taxes.
Even if you have been in the game for some time, you may not be aware of recent changes introduced by the IRS regarding taxes levied on virtual currency transactions.
Here you will learn about these changes and how they can affect your investment from now on.
With the 2017 passage of the Tax Cuts and Jobs Act (effective January 1, 2018) came major changes in the way many Americans filed their taxes. While news networks debated these changes at length, there seemed to be little public discussion of how the new tax laws would affect cryptocurrency traders. While the new tax code may not have included drastic changes regarding cryptocurrency, some of the alterations did have a ripple effect on crypto investors.
The Debate Over Like-kind Exchanges
Section 1031 of the tax code addressed like-kind exchanges and provided a clearer definition of such trades. The official IRS website states that: “Like-kind exchanges — when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or ‘like-kind’ — have long been permitted under the Internal Revenue Code. Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031.”
But with the Tax Cuts and Jobs Acts included this specification: “Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.”
What does this mean for crypto traders? Some tax experts say that this change makes it clear: cryptocurrency exchange does not qualify as a like-kind exchange. You can click here to learn more about how the Tax Cuts and Jobs Act impacts cryptocurrency taxation.
Breaking Down Cryptocurrency Taxation
In October of 2019, the IRS published the Frequently Asked Questions on Virtual Currency Transactions guidelines. This document clarified many of the questions and confusion crypto traders and tax analysts had about reporting cryptocurrency gains and losses.
The last thing you want as a budding or seasoned virtual currency investor is to find yourself afoul of the IRS because of tax obligations you didn’t know about or fully understand. You also don’t want to miss out on any possible tax exemptions or reliefs because of incomplete knowledge of how cryptocurrency activities go by the IRS.
The FAQ list explains the guidelines on how the IRS expects you to report digital currency transactions and how it treats such transactions for taxation. What information stands out in this document?
If you’re engaged in cryptocurrency mining, cryptocurrency taxes will apply to you in two general ways. The IRS perceives crypto miners as self-employed earners, and thus their earnings in the course of their trade are subject to self-employment tax. Income made from any appreciation in the value of the coins you mine is also liable to tax as capital gains tax.
You need to know that cryptocurrency is property, so the taxation principles that apply to other property kinds also apply to crypto. If you buy coins and sell them for fiat money, you must declare a profit if you sell at a higher price than purchased. In this case, this transaction will be subject to capital gains tax. The same applies if you use your Bitcoins or altcoins to buy goods or services as well as to coin-to-coin trades—trading your Bitcoins for Ethereum, for instance.
It also applies to crypto investors holding cryptocurrencies as capital assets while speculating on their future value. That’s because the IRS views the currency as an investment income, which you must declare on Form 8949. You should also declare capital losses in the same way, and if recorded, they will offset capital gains.
“Not Knowing” is No Defense
If you do go the crypto way and are fortunate enough to see your investment pay off, don’t forget your obligations to the IRS. Take time to go through all the cryptocurrency-related tax laws and see which kind of taxes apply to you.