Introduction

When are cryptocurrencies taxed?




    Cryptocurrencies, such as Bitcoin and Ethereum, have been around for a decade now. Little needs to be said about their popularity- Coinbase, a cryptocurrency exchange, has over 35 million registered customers. However, only a few hundred traders were reporting their crypto trades until recently. 

 

In these document you’ll get to get an overview of the why, how and what of cryptocurrency taxes from why did cryptocurrency gets taxes, How are cryptocurrencies taxed, and how to calculate tax on crypto assets, what are taxable events and what to do with your hardfork, mining, staking and other complex transactions and more.


The nature of cryptocurrencies


    The IRS classified cryptocurrencies as assets in 2014, but it was not until last year that the IRS started going after people for not reporting their crypto income and transactions. Virtual currency is regarded, by the IRS, as ‘property’ for calculating the tax liability. Every US taxpayer must record all cryptocurrency transactions and recognize a taxable loss or gain every time it is exchanged for US Dollars, services, and/or goods. Failure to accurately report a cryptocurrency transaction in a tax return can lead to interest, penalties, and even legal action in some cases.


    Even though the term ‘coin’ is used for cryptocurrencies, it is not a currency; it can be exchanged for services and products. Some employers are also paying their employees in bitcoins. All this brings up the question as to what constitutes a taxable event?



Taxable events for cryptocurrencies


    Cryptocurrency brokers do not have to issue 1099 forms to their customers. Thus, in simpler terms, none of the crypto intermediaries, brokers, or exchanges, are obliged to furnish investors with tax reports. It is the investor’s responsibility to disclose all activity to the IRS in order to avoid tax evasion charges.  


    Understanding how and when cryptocurrencies are taxed is the first step to generating a tax report. Taxable events are such that with the consummation of a given event, an obligation to pay taxes arises. The taxable transactions with regards to cryptocurrencies include:


  • Selling a cryptocurrency in exchange for currency (US Dollars)

  • Converting one cryptocurrency to another (for instance Bitcoin to Ethereum)

  • Paying for products or services via cryptocurrency

  • Receiving cryptocurrency through an airdrop 

  • Receiving cryptocurrency as a result of hard forks



    The first two scenarios are relatively obvious- exchanging cryptocurrency to another form or for cash requires one to pay tax. The tax can vary depending on how long the cryptocurrency is held (less than a year or more). 


    Cryptocurrencies are also taxed when acquired in exchange for services provided and via airdrops and hard forks. The last 3 points are something that not everyone may be aware of- but are equally important to know about. 


    Taxation of these virtual currencies requires converting them into US Dollars before calculating the tax. This is done using the fair market value of the cryptocurrency on the date it was first received/acquired. For instance, if 1 Bitcoin was purchased US Dollars when its price was $9,000, then the tax basis would be $9,000.



Cryptocurrency bookkeeping rules of thumb


    Despite having been around for over ten years, cryptocurrency laws and regulations are still new, with many in the formative stage. There are a few key points to consider when bookkeeping crypto-assets in compliance with the corresponding regulation:


  • A taxpayer must account for the fair market value of the cryptocurrency when using it to pay for a service or product.

  • The fair market value of a cryptocurrency is evaluated on the date it was acquired

  • As a taxpayer, one can have a virtual gain or loss on cryptocurrency. For example, if bitcoin purchased for the peak value will incur a loss when sold for US dollars. It is vital to record the cryptocurrency’s value when received as well as when spent to calculate this accurately. 

For regulatory compliance, when Bitcoin is accepted as income, a valuation strategy must be selected and recorded in 1120 Form or Schedule C. They should then reduce by expenses for business as the year progresses.