When Satoshi Nakamoto ventured into inventing the ‘digital cash’, not one living soul could think of virtual or cryptocurrency to emerge into the financial world – Bitcoins. This was the mere existence of a type of decentralized currency immune to any governmental interference that existed much prior to Satoshi’s work.
Introduction to Virtual Currency
In 1983, the first mention of e-cash, or Digital cash was put forth by David Chaum – In 1990, he founded DigiCash, which unfortunately filed soon for bankruptcy. However, he had already paved the way for something much bigger for the later years to see. Widely used e-gold was next in line to have millions of users before The US Government shut it down in 2008 – followed by Bitcoin in around the same time. Dot-com bubble, Q and QQ Coins, Liberty Reserves, and many more followed at the same time due to the aftermath of DigiCash – all of which were the center of scandals and money laundering lobbies.
Bitcoin, today is the most accepted and widely used digital currency in the world.
Cryptocurrency and Taxes
If there are currencies and finances involved, there ought to be Taxes at some point in time. Virtual currency transactions are taxable as per the IRS rulebook in the same format as any other property. These are to be reported in tax returns. According to the latest developments, close to 10,000 bitcoin account holders are being monitored for their lack of mention regarding their investments from 2017.
Cryptocurrencies are seen as an investment similar to dividends, stocks, funds, or they are transactional like ‘convertible’ virtual currency (coined by IRS) – this makes two different types of tax filing procedures for each type.
However, the latest records highlight that while there are several brokers and agencies that offer cryptocurrency trading, none are obligated to provide the tax records. This makes the individual responsible for maintaining the necessary information on cryptocurrency dealings.
How does Tax on Virtual Currency and Cryptocurrency work?
Virtual currency is treated as property assets and general tax principles apply. It is essential to display the facts about the cost, what the price was at the time you purchased them and the cost of them at the time of sale. Failure to do so may cost you exponentially. Similar to any other investment, the selling and profits depend on the holding period and are subject to a privy. Capital gains and losses are classified as short term if the holding period is under a year and are taxed as “ordinary income” and are subject to rates between 10% to 37%. Those held over a year are considered long term and are taxed at a more favorable tax rate. Tax Cuts and Jobs Act (TCJA) created unique tax brackets for long-term capital gains tax. These numbers generally change from year to year.
Note: Taxpayers with adjusted gross income above certain amounts are subject to an additional 3.8 percent net investment income tax. Individuals with significant investment income may be subject to the Net Investment Income Tax (NIIT).
If you have net capital losses that are more than the limit, you can carry the loss forward to later years.
IRS and Taxes
While reporting for any gains or losses on cryptocurrency capital investment, IRS mandates Form-8949 along with Form 1040 Schedule D for details on the sales and disposition of the currency.
If your employer pays you in Virtual currency for your services, that is to be mentioned in the income statement with the Fair Market Value (FMV) which is further subject to Federal Insurance Contribution Act, Federal Unemployment Tax Act, and is to be mentioned on Form W-2.
How will the IRS know you work with Virtual currencies?
There are a couple of ways, but 3 plausible solutions are known to work efficiently:
a. Form 1099-K or 1099-B
You receive these forms from your crypto exchange and the IRS knows about them as well. The Information Reporting Program is used. The Form 1099-K is generated and one copy is shared with the IRS. If these amounts are not mentioned in the returns, IRS will flag the accounts and you stand course to receive a notice. Form 1099-B, the principles are the same if under brokers and barter exchange.
b. Issuing Subpoenas to cryptocurrency agencies releases data and details of the virtual currency account holders to the IRS. This then matched with the returns filed and tax computed makes it transparent to holdings, if any.
c. Schedule 1-yes?: With 2020, there is a question on the top asking a very generic question about the individual’s association with virtual currency. This is tricky; if you have only held bitcoin, there is no taxable income to report – which means, the IRS will keep an eye on you for the next few years for any viable, taxable transactions. A ‘Yes’, means the IRS will now scan all the forms and returns filed for the tax computing amount.
So what next?
All the information mentioned above is to be considered as tax guidance. IRS should be in light of all the assets and investments, transactions, and barter services that are undertaken. This saves on penalties and fines and for a smooth process of tax returns.
Questions, feel free to reach out to the team for more information – visit etaxservices.net or contact us at firstname.lastname@example.org