Taxes and Virtual Currencies: What You Need to Know

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Virtual currency coins laid on top of tax documents, next to a calculator

Virtual currencies are all the rage lately. Here are some tax consequences you must know if you decide to dip your toe in that world.

The IRS is Paying Close Attention

The first thing to know is that the IRS is scrutinizing virtual currency transactions, so if you live in the U.S. you'll have to report your transactions in Bitcoins and the like to the IRS. Despite some early misconceptions, virtual currency transactions can be traced back to their owners by governments and other cyber sleuths.

In fact, the IRS just won a case late in 2017 against the virtual currency storage company Coinbase, allowing the agency to access records of more than 14,000 customers and assessing taxes back on those who have not properly reported their transactions.

If you decide to use or hold virtual currencies, carefully report and pay tax on your transactions. Act as if you are going to be audited, because if you do not, you just might be!

It's Property, Not Money

Note that the IRS does not consider Bitcoin or other virtual currencies as money, because they are not legal tender. Instead, they are considered property. That means that if you are paid in Bitcoin, you will have to report it based on your fair market value on the date you received it.

And, if you sell Bitcoin, you have to pay tax on your gain using the cost (basis) of when you received it. The IRS has said that if Bitcoin is held as a capital asset, like a stock or a bond, then you would pay capital gains tax. Otherwise, if it is not held as a capital asset (for example if it is treated as inventory that you intend to sell to customers), it would be taxed as ordinary income.

Example:

Craig Crypto bought a single Bitcoin on Dec. 29, 2016 for $967. After holding it as an investment (capital asset) for a year, Craig sold his Bitcoin for $ 14,492. I have reported and paid 15 percent taxes to capital gain on his profit of $13,525.

Be Aware of the Risk

In addition to the increased oversight by the IRS, virtual currencies are at risk of virtual theft with no recourse to a government agency like the Federal Deposit Insurance Corporation, which insures U.S. bank balances. Do your research on storage and security before you invest. And if you need help with any tax questions related to virtual currency, do not hesitate to call.


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Disclaimer

The information in this article is written as accurately as possible and to best of the writer's knowledge. However, there may be omissions, errors, or mistakes. Because of this and changes in circumstances, the information in this article is subject to change. This article is for informational purposes only and should not serve as professional, financial, medical, emotional, and/or legal advice. Readers may rely on the information on this article at their own risk, but they should consult a CPA, financial expert, or other professional for advice. Givilancz & Martinez, PLLC reserves the right to change and handle this article series, and therefore, may remove or alter any part of this article or the comments section. Any comments inserted by readers are not the responsibility of G&M PLLC and do not represent the thoughts or ideas of G&M PLLC.