The acceptance of bitcoin as legal cash in El Salvador may have been a watershed event for cryptocurrencies. But, even though you can use cryptocurrency to buy and sell goods and services in the United States, don’t imagine for a second that it’s the same as cash – at least not if you want to avoid issues with the IRS.
When you sell virtual currencies, they are taxed as property or as an investment. To complicate matters further, using them to purchase something technically constitutes as selling.
If you are paid in bitcoin or another cryptocurrency, however, that will be considered taxable income to you.
Almost every transaction is taxable and must be declared.
So, if you couldn’t resist jumping in on, say, bitcoin’s wild journey – it soared 437 percent in only a year, trading north of $60,000 in April and falling below $43,000 this week – keep good records, because you are responsible for retaining paperwork for every single transaction.
There is no legal requirement for third-party reporting of cryptocurrency trades or many sorts of cryptocurrency payments. However, if the Infrastructure Investment and Jobs Act is passed, this might alter very soon. If it is passed, exchanges such as Coinbase will be required to report your trades. The bill has passed the Senate and will be debated in the House later this month.
In the meantime, and especially if the law is not passed, the IRS will use a variety of methods to determine if you have engaged in taxable crypto transactions.
According to Mark Luscombe, lead federal tax analyst for Wolters Kluwer Tax & Accounting, any business that pays more than $600 to a non-employee or pays wages to an employee must declare that revenue to the IRS.
Furthermore, at the top of their 1040 form, every federal tax filer must truthfully answer a question concerning whether they received, sold, transmitted, swapped, or otherwise acquired any financial interest in any virtual currency during the tax year.
Any capital gain or loss from the selling of your bitcoins must be reported. That will be decided by the difference – in US dollars – between what you paid for them when you bought them and what you received when you sold them.
If you owned the investment for a year or less and it had increased in value by the time you sold it, your profit will be taxed as ordinary income. If you kept it for more than a year, you’d have to pay capital gains taxes on it.
If you lost money on the sale, you may use your capital loss to offset any capital gains you incurred in other investments, Luscombe said.