In the US, the IRS classifies and taxes cryptocurrency as capital gains, which is a kin to buying and selling physical real estate. Cryptocurrency is thus considered virtual real estate.
Furthermore, wages paid to employees using cryptocurrency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes. Any payments using cryptocurrency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099. The character of gain or loss from the sale or exchange of cryptocurrency depends on whether the cryptocurrency in question is a capital asset in the hands of the taxpayer. Any payments made using cryptocurrency is subject to information reporting to the same extent as any other payment made in property.
Here are a few steps you can take to ensure that you don’t get any unexpected notices or bills in the mail:
- Honesty is your best policy. Don’t try to purposefully cheat the system and be sure to report all of your earnings and losses honestly and accurately.
- Keep all of your paperwork, receipts and reports of transactions and purchases just as you would with traditional fiat. Nearly all cryptocurrency wallets and exchanges have a bulk export feature where you can download your entire historical transaction data into a CSV / Excel file.
- Be consistent with your reporting. Since cryptocurrencies can behave like stocks and are taxed as capital gains against the US dollar, you will need to know the time and cost at which you purchased your cryptocurrency, as well as the time and cost at which you sold your cryptocurrency. You can use methodologies like first-in-first-out (FIFO) or last-in-first-out (LIFO) to keep track of your gains and losses.
- Do your taxes on time. Late filings are hit with additional penalties and fees and there is no reason why you should have to pay more than your fair amount.
Many people believe that because some cryptocurrencies are anonymous they are somehow immune to taxation, when as you’ll come to learn, this couldn’t be further from the truth. The IRS released a statement in 2017 saying they have partnered with Chainalysis and have begun scraping the web for various tags; places like forums, social media, blogs, exchanges, etc. They also have information on over 25% of all Coinbase wallets opened to-date.
Please pay your taxes and help build global trust in cryptocurrency. If many people don’t pay their fair share of taxes, the result will add even more undesirable scrutiny and regulation to the cryptocurrency community. You must consult with a qualified tax and investment professional(s) to ensure that you are not breaking the law and to support the quality and longevity of your investments.
Disclaimer: CryptoAnswers.net does not provide investment, tax, or legal advice, and nothing in this guide or any articles or communications from Cryptoanswers.net should be taken as such. In addition, Cryptoanswers.net does not represent any government nor are we agents of any government. Before undertaking any action, be sure to discuss your options with a qualified advisor.