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 toignore.
Since then, the excitement and opportunitiessurrounding cryptocurrency have been endless. With all the debate surroundingthis topic, however, investors typically forget about one thing: cryptocurrencytaxation. As an investor, it’s important to know that almost every transaction,which includes exchanging, trading, and spending, will likely be taxed withinthe 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 investorsto report Bitcoin transactions of all kinds, no matter how big or small thepurchase. Because Bitcoin is now viewed as an asset, even the smallestpurchases will incur capital gains on their taxes in the long run. So, with allthese new tax laws and loopholes, is it still possible to become a smart Bitcoin investor? The answer is yes, as longas you understand the following:
Do IHave to Pay Taxes on Bitcoin Gains?
Generally speaking, whenever transactions arebeing made using Bitcoin, there are tax consequences. That’s because theIRS has begun treating Bitcoin as property — not as currency. While this mightsound like a minor distinction, it’s not. Instead, it helps the governmentdetermine how Bitcoin should be taxed, what information investors will need tomake sure they’re paying the right amount of taxes, and what tax planningmethods we can use to lower taxes for transactions.
In order to have a better understanding ofthis, 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.
To properly pay taxes for your transactionsusing Bitcoin, you’ll need to gather some information from each sale you’ve conductedthroughout the year. To make sure your numbers are accurate, you’ll want toinclude the basis for each amount of Bitcoin you’ve bought or sold, the date ofthe purchase, and the price. With current projections looking good, it’s hardto imagine the value of Bitcoin dropping, but being diligent when it comes totaxation can help investors act wisely.
Bitcoin,Cryptocurrencies, and Digital Taxation
According to Villanova University,“cryptocurrency has evolved from a somewhat obscure technological term in thelate 2000s to a budding, potentially lucrative financial investment in justunder a decade … Nevertheless, countries around the world are taking note ofthe growth of cryptocurrency and the enormous tax revenue potential of whatsome are calling ‘the future of currency’.” As cryptocurrency grows, so willtaxation.
When it comes to taxation, we are now at aturning point; although many states haven’t explicitly written new lawscovering taxation of digital goods, they may use current laws that were writtenfor mail order companies as an alternative method. For this reason, it’simportant to pay close attention to taxation laws and make sure that you’refollowing them to avoid owing a substantial amount.
So, where will digital taxation go from here?
Well, one thing is for certain: Taxation ondigital goods isn’t going anywhere. Additionally, isolated concepts and taxlaws do not provide clear objectives for investors and vendors. However, asmore states take time to refine their tax laws to have a clear definition ofdigital goods and taxation, we can expect other states to do the same. As ofright now, there are only 16 states that are working on defining digital goodson 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 thathave a clear definition on digital goods and taxation. Because of this, there’sstill a lot of confusion on the topic. It’s strongly recommended for eachinvestor to do their own research by looking up state tax laws. This can helpinvestors avoid financial penalties in the long run. Keep inmind that, while some tax laws serve as general guidelines, others are moredirectly related to digital goods and taxation.
Conclusion
It’s important to understand how Bitcoin worksbefore making an investment. It’s equally important to pay attention to salestax laws within the United States and understand basic tax laws. The future ofBitcoin and sales tax depends on the popularity within the upcoming years. In the end, no matter how much you spend, it’simportant 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 developedregarding this topic, keeping detailed records will be your lifeline — andcould prevent you from
Contributors
