Law abiding citizens pay taxes. That goes for most of the American population, which takes its toll on cryptocurrency investors who have made significant gains recently. If you profited in the recent year, make sure to follow the current regulations placed on cryptocurrency. It is not recognized as a decentralized currency by the government. Instead, it is property subject to taxation. Undeniably, this has raised doubts about how anti-central or not cryptocurrency can be. Nevertheless, the rules are still valid, and here is how you can prepare for cryptocurrency taxes this upcoming season.
The IRS has issued Notice 2014-21 that has changed how investors and traders alike will file their taxes this coming tax season. Although it is not completely clear around all sides of the matter, the new regulation poses cryptocurrency as a taxable property. Bitcoin, Litecoin, XRP, and so on, are called “virtual currencies” among online communities, but in the eyes of the IRS, they are not.
The notice places the responsibility of tracking virtual purchases vigilantly. It is a good idea to keep a ledger of every transaction. In addition, record should be noted as to when the hard or online wallet was created.
The issue is that many people use numerous wallets online for security purposes. It feels redundant for investors to allocate all their purchases in one wallet solely for taxes. Otherwise, a complex accounting system needs to be setup just for tax purposes to track all taxable cryptocurrency property.
To be clear, since coins are only semi-anonymous, hiding away from Notice 2014-21 through money laundering and tax circumvention is not necessarily possible for most coin users. Namely, using mainstream Bitcoin exchanges lets users hide their identities, but transaction details are still open to investigation by the government. Simply stated, those who attempt hiding their taxes can be sure to be tracked down.
Business or not, mining is also included as self-employment, personal, or business income. Take this as an example from the Miner’s Union: “…[A]ssume you mine 1 bitcoin in 2013,” the government tax agency writes. “On the day it was mined, the market price of bitcoin was $1,000. You have $1,000 of taxable income in 2013. Going forward, your basis in the bitcoin is $1,000. If you later sell the bitcoin for $1,200, you have a taxable gain of $1,200 – $1,000 = $200.” In layman’s terms, the income from mining then selling the bitcoin is completely taxable.
While you are allocating a budget for electricity, time, and hardware costs when mining, you need to set aside a portion for the new tax laws too. Estimate at least a self-employment tax to be exercised upon all digital coin earnings. Whether you believe a solo mining rig is an actual small business or not, the earnings from the sold coins are taxed this year. Plus, you should not expect this change any time soon, or at all for that matter.
This is where hiring a tax professional makes sense for the ever-changing and polishing of IRS notice updates. While you are in the deep end of exchanging, mining, and purchasing goods and services with virtual currencies, you can rest at ease with a reliable pro settling your taxes.
In all fifty states, there is an abundance of tax firms and consultants ready to assist you. Many have been around since 2013 assisting small to large companies with their annual tax profile. You can visit the link above for a substantial list of the currently practicing tax pros to assist you this year. Take note, some of them specialize in cryptocurrency or virtual exchange taxes, and others include it in their general tax packages. Either way, you have a pretty good chance of finding someone near you to aid in playing by the rules.
If you want to hire help or not, prepare to pay taxes. Dodging payments sets up a murky course with the law, but it is still your decision. Any sort of income is taxable unless otherwise noted by the IRS.
It Is Not Clear Yet
It is recommended to at least try and make the best effort you can with cryptocurrency taxes for now. While the new stipulations are not clear-cut yet, making no effort may be viewed as tax evasion. As with all other taxable income and investments, a decent portion will be taken out of your earnings. Setting aside a portion of your income or scaling up your business ever so slightly can make the situation a lot less tedious and stressful. Additionally, hiring a helping hand for federal taxes can go a long way in terms of not breaking a sweat yourself. Truly decentralized currency maybe not so far off after all. The law is being laid down, but hope never ceases.