Is Cryptocurrency Taxable?: What You Need to Know About Cryptocurrencies

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Cryptocurrency is designed to work as a medium of exchange to secure transactions, to verify transfer of assets and to control the creation of additional units. The process of purchasing cryptocurrency may still be unclear to the majority, but for a number of investors, it is a potentially profitable investment asset aside from being tagged as the future of money.

And just like many of us, you might also be wondering: is cryptocurrency taxable? Read more about it here to find out about the basics that you need to know.

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Cryptocurrency transactions are not anonymous, and investors verify their accounts and create a number of methods for payment like debit and credit card payments, wire transfers or bank account transactions.

The money is made through the mining process where someone can purchase and sell bitcoin on a network or exchange, converting gains from bitcoin to US dollars or other currencies, back to dollars or cryptocurrency.

Publicity and Legality

Representatives from Central Bank stated that cryptocurrencies could be a significant threat to the economy as there can be a reduction of confidence from the consumers in flat currencies or cash as it becomes more popular. It was also pointed out how difficult it would be to gather economic data activities and that online currencies present a challenge over the functions of the exchange rate and monetary policy.

Compared with currencies held by financial institutions, most cryptocurrencies are designed to gradually decrease the production of money, placing a cap on the total amount that will be circulating. Cryptocurrencies can be more difficult for seizure by law enforcement due to its leveraging cryptographic technologies.

A number of countries have allowed the trade and use of cryptocurrencies; others have restricted and banned it due to the challenges and potential damages of its use.

However, other government agencies have classified the use of bitcoins differently and treated cryptocurrencies as legal. Although unlike centralized banking where the government controls the value of currency, cryptocurrencies are fully decentralized.

Bitcoin has been declared to be considered as property instead of currency for tax purposes on 2014 by the United States Internal Revenue Service (IRS) which also clarified the legality of the investments in Bitcoins or profits made from them.

The IRS is stating that the income must be treated as a capital which is subject to either short- or long-term capital income tax rates. If the gain or asset is held longer than twelve months, record-keeping rules and applicable taxes will be given on its use.

However, despite its popularity and demand, issues concerning its threat to the society has not died down considering the complexity of how the transactions are made using cryptocurrencies making it almost impossible to track web criminals who are anonymous. Due to its lack of directives and its independence from formal banking systems, it can be enabling criminals to launder money and evade taxes.

Is Cryptocurrency Taxable: All About Cryptocurrencies and Taxes

Tax evasion becomes simpler as it is very difficult to track deals or arrangements made using existing cryptocurrencies due to the complexity of how it is being done.

Due to this fact, the Financial Crimes Enforcement Network has formulated guidelines and rules for cryptocurrencies which include an important caution for miners. A warning was given saying that anyone who is creating bitcoins and exchanging them for a flat currency is not excused and exempted from the law.

From there, it was ruled that Bitcoin is a capital asset which is taxed as it is personal property and not a currency. Goods or services purchased with Bitcoins are also considered gains and gains made from converting Bitcoins into a flat currency are subject to capital gains tax. That means it is also treated like real estate or gold and are subject to tax in most cases when held for investment.

However, it is still not clear to some if trading cryptocurrency is a taxable event for the year or if an individual can defer paying taxes until they convert the cryptocurrency to USD or other currencies.

For accounts of retired inventors, when the account generates income from a sale or purchase of a capital asset, the account will not pay for taxes and any tax would be delayed to the future when a distribution is taken by the retired account holder.

Therefore, using funds after retirement to invest in cryptocurrencies could allow an individual to eliminate or delay any tax due made from the said investment.

The Verdict

After everything that we have discussed, the question remainsIs cryptocurrency taxable? In conclusion, we can say that investments in cryptocurrency are highly volatile and risky. Due diligence and extreme caution must be considered by anymore who is interested in investing.

There is no clear direction on the basis of cryptocurrency following the like-kind exchange rules, and it is just one of the many unanswered questions about this topic. Hiring an accountant can be helpful to help you if you had substantial activity in the cryptocurrency space.

Trading cryptocurrency and so is using it in any way are likely taxable events, and that means every cryptocurrency transaction needs to be recorded and applicable taxes need to be paid.

Cryptocurrency is treated as a property and not a currency, for tax purposes. This can be identified when you hold cryptocurrency as an investment, use it as a payment method, use it for mining or treat it as inventory.

While cryptocurrency is subject to capital gains taxes, the tax implications can differ based on how the property is treated in the hands of the taxpayer which means you will need to deal with short- and long-term losses and capital gains.

With this being said, one should understand that capital gains count toward the total taxable income and how independent capital losses and capital gains in a year can be written off against each other.

Each country has their own rules for the cryptocurrency, and they differ in so many ways. The points discussed in this post apply to the United States specifically, so make sure to check and read on the rules of other countries if you are paying taxes somewhere else.

Our Top Pick For Crypto Investment

Invest in Cryptocurrency NOW!

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