Bitcoin and taxes: An update

Bitcoin exploded in popularity in 2017. The cryptocurrency market can be highly volatile; the currency rose from $600 in value per coin to $20,000 in that year. Regardless of its volatility, that kind of growth potential is impossible to ignore.

Since then, the excitement and opportunities surrounding cryptocurrency have been endless. With all the debate surrounding this topic, however, investors typically forget about one thing: cryptocurrency taxation. As an investor, it’s important to know that almost every transaction, which includes exchanging, trading, and spending, will likely be taxed within the United States, and this year will be no different.

That being said, 2019 will be a landmark year for reinforcing taxation on cryptocurrency. This means that taxpayers should do their best to stay ahead of the game rather than avoid the inevitable. After all, the IRS is always more willing to work with taxpayers who are honest and upfront than those who wait to be discovered.

Around the world, tax authorities have been working day and night to bring forth new regulations on cryptocurrencies. The IRS, along with many other regulatory agencies from around the globe, are pretty much on the same page when it comes to taxing Bitcoin exchanges. The agency believes that Bitcoin should be treated as an asset since it provides investors with economic value.

The IRS also made it mandatory for investors to report Bitcoin transactions of all kinds, no matter how big or small the purchase. Because Bitcoin is now viewed as an asset, even the smallest purchases will incur capital gains on their taxes in the long run. So, with all these new tax laws and loopholes, is it still possible to become a smart Bitcoin investor? The answer is yes, as long as you understand the following:

Do I Have to Pay Taxes on Bitcoin Gains?

Generally speaking, whenever transactions are being made using Bitcoin, there are tax consequences. That’s because the IRS has begun treating Bitcoin as property — not as currency. While this might sound like a minor distinction, it’s not. Instead, it helps the government determine how Bitcoin should be taxed, what information investors will need to make sure they’re paying the right amount of taxes, and what tax planning methods we can use to lower taxes for transactions.

In order to have a better understanding of this, the IRS also states in Announcement 2014-12:

For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.

Image by Sulayman Sanyang from Pixabay

To properly pay taxes for your transactions using Bitcoin, you’ll need to gather some information from each sale you’ve conducted throughout the year. To make sure your numbers are accurate, you’ll want to include the basis for each amount of Bitcoin you’ve bought or sold, the date of the purchase, and the price. With current projections looking good, it’s hard to imagine the value of Bitcoin dropping, but being diligent when it comes to taxation can help investors act wisely.

Bitcoin, Cryptocurrencies, and Digital Taxation

According to Villanova University, “cryptocurrency has evolved from a somewhat obscure technological term in the late 2000s to a budding, potentially lucrative financial investment in just under a decade … Nevertheless, countries around the world are taking note of the growth of cryptocurrency and the enormous tax revenue potential of what some are calling ‘the future of currency’.” As cryptocurrency grows, so will taxation.

When it comes to taxation, we are now at a turning point; although many states haven’t explicitly written new laws covering taxation of digital goods, they may use current laws that were written for mail order companies as an alternative method. For this reason, it’s important to pay close attention to taxation laws and make sure that you’re following them to avoid owing a substantial amount.

So, where will digital taxation go from here?

Well, one thing is for certain: Taxation on digital goods isn’t going anywhere. Additionally, isolated concepts and tax laws do not provide clear objectives for investors and vendors. However, as more states take time to refine their tax laws to have a clear definition of digital goods and taxation, we can expect other states to do the same. As of right now, there are only 16 states that are working on defining digital goods on their own terms. Those states are:

  • Arkansas
  • Connecticut
  • Georgia
  • Iowa
  • Illinois
  • Kansas
  • Louisiana
  • Michigan
  • Minnesota
  • Maine
  • Mississippi
  • North Carolina
  • Ohio
  • Oklahoma
  • Texas
  • West Virginia

There’s only a small percentage of states that have a clear definition on digital goods and taxation. Because of this, there’s still a lot of confusion on the topic. It’s strongly recommended for each investor to do their own research by looking up state tax laws. This can help investors avoid financial penalties in the long run. Keep in mind that, while some tax laws serve as general guidelines, others are more directly related to digital goods and taxation.

Conclusion

It’s important to understand how Bitcoin works before making an investment. It’s equally important to pay attention to sales tax laws within the United States and understand basic tax laws. The future of Bitcoin and sales tax depends on the popularity within the upcoming years. In the end, no matter how much you spend, it’s important to keep detailed records. That way, if you’re audited by the IRS, you’ll have records to show them. Since information is still being developed regarding this topic, keeping detailed records will be your lifeline — and could prevent you from

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