The Internal Revenue Services (IRS) for the past couple of years has been cracking down on individuals or groups, who have been running away from paying cryptocurrency taxes.
Cryptocurrency is defined simply as a virtual asset that is used as a medium of exchange.
The IRS knows that these virtual currencies may be used to pay for goods and services and may also be held as investment. However, many use cryptocurrencies as a way to launder money. In 2013 to 2015, less than 900 people filed cryptocurrency taxes.
This is why the IRS is also strengthening its focus on digital assets.
And since it is considered just like any asset, there are tax liabilities and responsibilities that go along with it and, of course, has consequences if you fail to pay taxes.
Crypto investors need to collect all the necessary information needed in order to pay your taxes and this include digging through all your records and data that you will report to the IRS.
Refusal to pay cryptocurrency tax will result to a maximum prison sentence of five years and you will be made to pay a maximum fine of $250,000.
In 2017, the court ruled over a company called Coinbase, a company that middlemans transactions of virtual currencies like Bitcoin. The court granted the IRS the legal right to investigate Coinbase account holders, who did not pay federal taxes from their cryptocurrency profits.
Because of this, the company Coinbase was required to release information about investors, who traded over $20,000, to find out if there were groups or individuals who skipped paying taxes.
This sends a clear message that the IRS is serious in implementing the tax laws on virtual currencies.
Virtual currency are treated as property
According to the IRS, under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purpose.
The IRS’ Guidance on Virtual Currencies states that “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”
This means that anyone who use cryptocurrency has to pay capital gains taxes.
TWO TYPES OF CRYPTOCURRENCY TAXES
There are two kinds: the long-term and short-term.
It is considered a long-term Capital Gains Tax if you have held on to the currency for more than a year before trading it. The short-term would mean you’ve had it for less than a year.
Also, just like in other assets, if you lose money on your cryptocurrency trades, you can also claim a loss and you can save on capital gains taxes.
Salaries in crypto
When an employee is paid in cryptocurrency, this is considered an earning and therefore, also taxable.
Employees and employers need to report cryptocurrency earning and withholding just as they would with the regular currency.
Cryptocurrency miners NEED to pay taxes
Cryptocurrency miners, on the other hand, are also obliged to pay taxes as they also earn from cryptomining.
Whenever a cryptocurrency transaction is made, it is added into what is called the blockchain ledger. The miner will make sure that this transaction is authentic by solving a complicated mathematical code by using a specialized hardware in their computer. This process is called cryptomining.
Competition amongst cryptocurrency miners is also stiff as they fight it out on who gets to crack the code first.
The first to crack the code will be rewarded a minimal amount for the services rendered.
This is considered an earning and thus, taxable. Cryptominers are considered self-employed and will therefore pay taxes corresponding to it. They may also deduct expenses such as electricity and internet fees.
Two Tax forms must be filled out
Those who need to file for income tax returns for their digital trades have to fill out two different tax forms.
The investors use the Sales and Other Dispositions of Capital Assets Form 8949 This form lets investors explain the assets they have traded, the dates they were acquired and when they were sold.
They must also need to to divulge how much they earned and their net gains and losses. This form will also
The other form is Form 1040 Schedule D, which is used for traders.
Cryptocurrency tax checklist
Those who are in the cryptocurrency community must file their taxes before deadline. To make it easier, they must prepare all necessary requirements beforehand for a smooth-sailing transaction.
First, you need to figure out if you are a trader, an employee earning in cryptocurrency or you are a cryptominer. Why? Because each of them falls under different categories and will be filling out different tax forms, as explained above.
Secondly, you need to create a list of all taxable trades done for the year. Prepare all the needed information (date of trade, how much you sold it for, the cost of the trade, how much it was paid for and the net gains and losses) and calculate the amount in US currency at the time of the trade.
Third, fill out the forms in the category that you fall into. You can file it yourself or you can tap the services of an accountant to do this for you.
cryptocurrency tax exemptions
It is also important to note that not everyone who is into cryptocurrency are liable to pay taxes. Individuals who hold on to their cryptocurrencies are not taxed. Only those who sell and trade are subject to pay taxes.
Meanwhile, tokens, or cryptocurrency that represents a service or an asset and not as a currency are supposedly exempted from tax obligations.
A token refers to the digital asset that exists on a blockchain, which is literally just a string of numbers and letters that contain no real data but will lead you to another data. The IRS identifies cryptocurrency as substitute to real currency. And since ‘tokens’ are considered a service, it does not fall under IRS’s definition and therefore, not taxable.
This, however, is still a gray area. And because cryptocurrency is a relatively young concept, the IRS will be updating the tax laws that govern cryptocurrency.
As of the moment, those who fall under the categories mentioned must file their taxes on time to dodge any possible liabilities.
