Cryptocurrency Taxation in the US: Everything That You Must Know Before Filing Taxes

The Crypto-Craze and the Bitcoin Boom of 2017 witnessed many people making a large amount of profit with the help of cryptocurrency investments. Some currencies boomed as high as 9000% while the likes of Ripple boomed by 36,000%. Bitcoin, which began the year $950 was over $19,500 in late December. This cryptocurrency price rise was the reason a large number of people suddenly invested into cryptos, as they saw it as a ‘get-rich-quick’ scheme. 

However, while a lot of profit is being recorded in the crypto-trade, it must also be kept in mind that on every profit, taxes need to be paid. Amid the frenzy and the profits and all the ‘lambo to the moon if you HODl’ posts, one must never forget that the taxman is always knocking at your doors! The IRS is showing a special interest in cryptocurrency traders, as only a few hundred traders had shown Bitcoin profits in taxes in the previous years. 

Despite the community of traders considering cryptocurrencies as a means of virtual payment, the IRS considers it as a property when it comes to filing the taxes. This means that selling, trading, or exchanging Bitcoins would all be considered under capital gains. Receiving Bitcoins would be considered an ordinary income. This is quite in contrast with the German laws where spending Bitcoins is considered to be tax-free! Websites such as CryptoCoinJudge provide various such cryptocurrency updates and global insights that you need to know before you invest into cryptocurrencies! Here’s a quick look at how cryptocurrency taxation works.

How Cryptocurrency Taxation Works:

Trading Cryptocurrencies: Basically converting a currency to cash or generates either capital gains or losses. In case of a loss, taxes can be reduced as that can be shown as a capital loss.

Spending Cryptocurrencies: Spending cryptocurrencies is considered to be a long-term or a short-term profit or loss depending upon the value when the currencies were first purchased and the value of the currencies when they were spent. The length of the holding period also matters. Cryptocurrencies purchased for $1000 two years ago and spent for items worth $3000 would be taxed as a long-term capital gain tax of $2000. Similarly, short-term profits and losses are also considered. 

Exchanging Cryptocurrencies: If you exchange a Bitcoin token for an Ethereum token, or vice versa, this purchase is a taxable event as the token is considered as a property and a property has been sold. Hence, capital gains taxes will be applicable. 

ICOs: While there are some methods of fundraising in the US which are tax-free, ICOs are not one of them. ICOs generate ordinary income to businesses as well as individuals.

Receiving Crypto Payments: When you get paid in cryptocurrencies in exchange for products, services or salary, it will be treated as an ordinary income in the eyes of the law governing taxation.

Mining Cryptocurrencies: Cryptocurrency mining is considered as an ordinary income as per the US Tax laws. 

With the tax season here, it is critical to understand the details of Bitcoin taxation. While this does give you a fair picture of how cryptocurrency taxation works, it is always advised to hire a chartered accountant who will help you file the taxes in an efficient manner. While the past couple of months may not have been so exciting, cryptocurrencies are expected to bounce back and gain price over the next few months - file your taxes properly and keep trading!