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KNOW THE VERY WAY which shows up with rebellious looks in a calendar at any time after January 1 – starts as a scent, and then, gets darker from week to week, the closer it gets to April 15th. And now, Tax Day, as always, looms.
But this year, maybe, it's a little different from the last – you've got a little bit of it. of money invested in cryptocurrency. And even if currencies like Bitcoin, Ethereum and Ripple are ready to transform the financial system (not to mention the bank account), where it comes to your taxes, the cryptographic regulations are not "there" yet.
So where are they?
[Primadientrarenellarispostaunrapidoavvertimento:siamoquialFuturismDotCom[Beforewegetintotheansweraquickcaveat:wehereatFuturismDotCom[Primadientrarenellarispostaunrapidoavvertimento:siamoquialFuturismDotCom[Beforewegetintotheansweraquickcaveat:wehereatFuturismDotComthey are not remotely close to tax professionals. Honesty, even public accounting experts (CPAs) and registered agents (EAs) – the people you pay to manage taxes – are not completely sure how to deal with certain aspects of cryptosides. Basically what we are saying is – not that you would – but we are explicitly telling you not to use this article as a definitive source of information on this subject. Like you, we hate doing our taxes, so we're definitely not doing yours. Also, why we like you: please, please, for god's sake and for your freedom from a minimum security prison, consult a professional before submitting your taxes.]
One of the most interesting aspects of cryptocurrency, one might think, is his anonymity. Does not that mean the government can not find my money? You could think. And, well, not exactly. For one, Bitcoin is not everything anonymous. The parties at either end of a transaction are marked with pseudonyms. And it's not that difficult to connect your pseudonym to your true identity. The online vigilantes have unmasked extremist groups by receiving donations via crypto; organizations like Chainalysis, recently participated in an episode of the podcast focused on the Internet Reply to all, is specialized in making these connections, identifying cryptographic merchants in a matter of minutes.
As expected, the government took this over. The Internal Revenue Service (IRS) has used the services of some companies (including Chainalysis) to hunt down tax evaders, according to the Daily beast.
So, you probably should not risk paying taxes on your crypt. Try to dodge, and there's a good chance the government will find you.
Rules, rules, rules
But what this means to you also depends on how the government considers cryptocurrency. The IRS, in its infinite wisdom, actually provides some (limited) indications on the problem. In April 2014, IRS released the only official rules on what it calls "virtual currencies" – fiscal jargon for encryption. "For federal tax purposes, virtual currency is treated as a property," reads the document. For the government, the crypt exists somewhere between currency and investment.
"[The IRS] I would say that it can not be a currency because it is not supported by a government, "Wendy Coggins, EA and founder of Virtual Tax Incorporated told Futurism." Normal people would say that it is obviously an investment [as in] I'm investing in these new companies and I'm putting my sweaty savings in there and I hope to get a return from my investment".
To rectify this difference, IRS calls it "property" that, unlike investments, can be held for profit and traded (at least, this is the case before FY2018: the new tax law that specifically excludes cryptocurrency from traded products).
Since Bitcoin and other virtual currencies are considered properties, this means that you pay taxes on capital gains on any income you make. There are two types of capital gains that determine the rate at which you will be taxed: short-term capital gains are for properties that have been held for less than a year, while long-term capital gains cover all of this held in a year. Short-term rates are usually taxed at the same rate of income, while rates on long-term positions vary between zero and 20 percent, depending on the tax bracket.
The way you have acquired your cryptocurrency and what you have done affects the way you pay taxes on it. Some examples:
- If you have extracted your crypto, paid for your work or managed a company with a product purchased via cryptocurrency, then you will probably treat these gains as ordinary income.
- If, like many new people at Crypto, you bought your coins for investment purposes, then things get a little complicated.
- Did you buy bitcoins and you never exchanged them with other goods, services or coins? Good news! You do not owe taxes on your holdings.
- If you have exchanged your coins with the same value as another currency, you are still clear, at least for the 2017 tax season. This is called a similar exchange and until the new tax law comes into force next year, even these are not taxed.
- If, however, you have sold your holdings for cold cash, or used to purchase something other than another encryption, you must report this revenue.
- To report income, there are some things you need to keep track of. First, the price of coins at the time of purchase (also called your base); secondly, the price of the currency at the time of sale. From there, you can calculate your earnings with a simple formula: Sales Revenues – Base = taxable profit (or loss)
A small sample math: suppose you bought 1.0 BTC on July 1, 2017, you probably paid about $ 2.496. If you sold that coin on December 16, 2017, at the height of bitcoin-mania, you've probably received about $ 19,202. Including these numbers in the formula tells us that your income from that bitcoin sale is $ 16.706. what it is your capital gain – the income you pay taxes – for that currency.
The equation becomes more gloomy if your transactions are not so one by one. Let's say you bought bitcoins slowly for most of 2017 and only sold half of your participation in December. How do you establish your bases in that case? Which coin did you sell, exactly? Can you say that you only sold your most precious coins and therefore you have a lower income?
The short answer is that you or your tax advisor usually made this calculation using a method called "first in first out" or FIFO. When you sell your coins, assume that you are selling your first coins, or older, in calculating the base. You can also use LIFO, or "last in first release", but you have to stay true to whatever method you choose, year after year. IRS expects you to apply these rules in a reasonable and consistent manner. Your personal circumstances determine which method makes the most sense to you. Since this can have lasting effects on your finances, it is probably a good thing to decide with the contribution of your tax professional.
Mo 'Coin, Mo & # 39; Problems
Finally, there's the question of what to do with those extra coins you earned if you held a currency during a fork, like when Bitcoin bifurcated into bitcoins and bitcoin gold.
A cryptocurrency suffers a "fork" when there is a significant change in the underlying ledger protocol. For example, the bitcoin gold has become, because its administrators have introduced a new algorithm that modifies the way in which the currency can be mined. This was a "fork" – the division leaves the original ledger intact and creates a new separate ledger using the new protocols (a soft fork is different because, although initially the division creates two registers, the two unify as a single register and a currency).
If you've had some of that original currency before a difficult fork, then congratulations! You also have the same number of coins in the new currency. This is essentially free money – toand another complicated situation for our intrepid tax professionals.
While IRS has not issued an official statement on the matter, Coggins says it is probably safe to treat these new currencies as dividends – the profits received from shareholders – that are taxed as normal income. For example, if you own a traditional stock, you can receive dividends as a sort of reward from the company for your investment. The rules are different, but generally shareholders receive dividends as part of the company's profits, paid quarterly, in proportion to the number of shares they own.
"I own [stock in] Starbucks, and every quarter they send me 85 cents or something because it's a dividend, "said Coggins, despite being dissimilar in many respects, he says, dividends and durable forks create a kind of free money for investors. enough in his mind to treat them the same way when it comes to taxes.
Yes, all these "if, then" statements can make payment taxes on your cryptocurrency seem complicated, even more complicated than simple tax preparation in general. If you feel overwhelmed or confused, just be cool.
"It's a little like the rule of the prudent man," Coggins said referring to a known note. "What would a prudent man do? If you have made money legitimately, you should report it."
Of course, the best way to stay in the graces of IRS is to keep extensive records and consult with a tax professional. Or, even more simply:
Just pay the taxes. Honestly and on time. This usually keeps them away.
Disclosure: Several members of the Futurist team, including publishers of this piece, are personal investors in numerous cryptocurrency markets. Their personal investment prospects have no impact on editorial content.
