If you are new to cryptocurrencies but hold a ‘significant’ number, here’s a run-down of what you should consider when filing your next tax return. This article shares important areas to keep in mind, before providing suggestions on further resources that might help with this complex subject.
Since the IRS has classified cryptocurrency as property, all of the taxes that apply to sales of property, such as sales tax and capital-gains tax, apply.
Transactions are recorded on a permanent ledger
Created outside central banks, cryptocurrencies are digital forms of money. Since 2008 – the year Bitcoin was born – digital currencies have gone from being digital novelties to become trillion-dollar technologies challenging the status quo of global finance and transforming the way we invest, bank and spend money. Supporters see them as democratising finance, putting power in the hands of the people; while critics suggest they allow criminals, terrorist groups and rogue states evade tax, launder money and commit other crimes. How can this be? Cryptocurrencies allow people to make financial transactions without a central bank exerting control, whether that be a government-owned reserve, a private bank association or a non-governmental organisation such as the European Central Bank. In an increasingly centralised, controlled world, the potential for widespread empowerment and financial independence seems powerful. That so few even heard of cryptocurrencies before 2017 is itself a remarkable and transgressive form of grassroots organising: these intangible units of money emerged from nothing and, soon, everyone might have to trade in them. Who needs banks?
General ledgers track the financial transactions of an organisation and contain a chart of accounts with debits and credits recorded against it along such with subledgers that record data updates on a continually basis.
The general ledger accounts are like notebooks designed for entering the economic data that describe the events that affect the assets and obligations of the enterprise, the interest of the owners, and the revenues and expenses of the enterprise. They are also the source of data that can be used to create routinely the trial balances at periodic intervals of time and the financial statements.
It is secure
Cryptocurrency is a new form of money which enables us to move sums of money without any third parties, a value set by free markets not the national currencies which governments give us legal tender status, and it is based on a technology which makes it safer than moving funds via banks.
The ability to make cheap, instant transfers from any country in the world is one of cryptocurrency’s main appeal. It is often slower and more expensive to send a wire than it is to simply nod to someone.
But, despite their growing popularity, cryptocurrencies are also extremely risky investment vehicles. There are any number of speeds bumps to crypto investors – from hacks and bugs to volatility or regulation concerns; regulators are still trying to figure out how to draft coherent rules regarding cryptocurrencies. But in the meantime, many crypto exchanges and wallets will operate outside regulation with many investors sure to lose a lot of money in the process.
It is easy to use
When you buy, sell or trade cryptocurrency, you need to be mindful of the tax consequences. If you don’t report these sales to the IRS, you might incur penalties and interest. If you don’t file a return with the government, you could face more serious consequences, such as criminal prosecution for willfully attempting to evade tax.
In the US, the Internal Revenue Service (IRS) classifies cryptocurrencies as property and taxes any profit made by punters in trading and disposing of them as income by reference to the market price and cost basis at sale or exchange.
As soon as you make a profit, work out how much capital gains tax you owe by subtracting the selling price from the purchase or exchange price. The amount you owe will depend on how long you held the asset before selling it, and whether it was a short- or a long-term gain; you could offset capital gain against capital loss to reduce the amount of tax you owe.
It is regulated
Cryptocurrencies are under the watch of agencies such as the Commodity Futures Trading Commission and the Internal Revenue Service. The IRS considers the value of cryptocurrencies to be property and treats it as an income that can incur capital gains tax. People who are paid in cryptocurrencies must also inform about their income source.
Moreover, they seemed distinct because cryptos are difficult to define for regulatory purposes. This invited major regulatory headaches and facilitated unregulated aspects of the market, including money laundering and sanctions evasion as well as the financing of terrorism or criminality.
What then does it mean to ‘regulate’ cryptocurrency? If you read the current discussions in regulatory circles, the answer is that, to the extent it is coherent at all, it means that the regulatory agency tries to keep up with cryptocurrency. The Commodity Futures Trading Commission (CFTC), for example, regulates derivatives, while Financial Crimes Enforcement Network (FinCEN) regulates ‘money transmission businesses’ that sell cryptocurrency transactions, subjecting them to antimoney laundering/anti-terrorist financing laws, bank-secrecy acts, and so on – and to create various lists and blacklists of ‘Specially Designated Nationals and Blocked Entities’.
