Cryptocurrency is the topic of every third phone call you might overhear among the walkers while you were striding across the streets of mid-town Manhattan. And, the more Gavrilov & Co fields those cryptocurrency calls, given the time of year, the more you will hear about taxation.
Crypto-gold, Crypto-Estate Or Crypto-Pixels? What’s in Your Crypto-Wallet?
So how does the U.S. Government regard your cryptocurrency? Although we call it “currency,” the IRS does not tax it as currency. As we reported on this blog in our previous post, in the eyes of the US government, your cryptocurrency ranks as property. Yes, this means it is a capital asset like stocks, bonds, and other investment properties. And yes, this means you will owe capital gains taxes on it. The government treats it much like it is real estate or gold. Some of the rules fluctuate as you shall see in this blog. So you will pay both long and short-term capital gains taxes if you are holding your Bitcoin or other digital currency for investment.
Likewise, when or if you utilize digital currency for transactions, then expect to comply with other rules of the tax code. For guidance, the IRS has published some guidelines. But, be aware. This is not light reading.
They clearly explain, “In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”
The code does not merely relate to Bitcoin, but Litecoin, Ethereum and Stellar as well as many other types of cryptocurrency, regarding taxes and what we call taxable events.
A Gavrilov Alert: Warning! Figuring Your Own Cryptocurrency Tax Could Be Financially Hazardous to your Fiscal Health!
A smoker who buys a pack of cigarettes gets a health warning. Likewise, Gavrilov & Co is always ready to issue financial health warnings. Therefore, we must inform you that figuring your own cryptocurrency taxes could be hazardous to your fiscal health.
Please hire an accountant to give you expert assistance in your reports of Capital Gains from cryptocurrency.
Gavrilov & Co Announces: the Fab Four Rules of the Basic Cryptocurrency Tax. Or Can Capital Gains Digital Ducks Get Put in a Row?
To give you the big picture, we can give you four fabulous basic rules about cryptocurrency tax laws. We call them, “The Fab Four” but we recommend you also read deeply in the IRS Guidance from 2014.
1. In the first place, trading cryptocurrency to cryptocurrency is a taxable event. It is critical that you know you must calculate the fair market value in USD at the time of the trade.
2. Secondly, the IRS considers utilizing cryptocurrency to trade for goods and services as a taxable. It’s up to you to calculate the market value of the digital currency at the time you traded it for goods and services. And, surprise. You could also need to pay sales tax.
3. Remember that buying Cryptocurrency with US money is not a taxable event. How about some good news for crypto-ownership? You do not owe tax on crypto-money when you simply buy your cryptocurrency with your hard-earned US dollars.
This makes sense if you think about it; you cannot realize gains unless you trade, use or sell your digital currency.
In contrast, when you save the cryptocurrency for over a year, you will owe long-term capital gains. You’ll still save money, however. You will save because these are only taxable at half the rate of short-term capital gains.
4. Thus, essentially, if you do anything other than hold your cryptocurrency, then, you are doing a taxable event. And, just as we stated in our previous blog, you must comply with the IRS rules. In a nutshell, we reiterate, you must realize capital gains and losses when you trade, sell, or use any form of cryptocurrency.
The Answer to Everyone’s Number One Bitcoin Tax/ Capital Gains Question: Do I Pay on Cryptocurrency Gains I Lost Before Tax time?
If you used 2017 to do a small, medium or large amount of trading in the digital currency world, you and your accountant will need to validate your trading events and comply with tax laws regarding your capital gains.
At Gavrilov & Company, our tax squad will assist you with concrete calculations. And, we will carefully consider best evaluations of your digital currency trading life in 2017. You will have to “fiat” the cryptocurrency and figure its equivalent amount to dollars to discover the tax you will owe. We will help you. The time factor then becomes very important.
What if you made a lot of gains at the beginning of the year and then due to the unstable nature of the digital currency, you lose it before taxes are due?
Well, the ugly truth is you will still owe tax on money you do not any longer have in your possession.
Thus, if you are in this situation, you will understand why we say it is absolutely critical that you have a professional accountant like our hyper-trained tax squad.
The question Gavrilov and Co answers most often is simply “How do I report my cryptocurrency transactions? The answer may sound simple. But, again we recommend having professional help from a CPA. You will need to find and use Form 8949 to do your calculations and then report on Schedule D. And remember to include your traditional as well as cryptocurrency capital gains and losses.
Then came the New Tax Bill! or “What Ever Happened to my Crypto-coin Tax Break?”
“Like-kind” property is no longer viable as a tax strategy regarding cryptocurrency.” Previously there existed a wobbly loophole stolen from the real estate world. The old tax code allowed you to defer capital gains under 1031 Exchange. Then, in this instance a taxpayer can sell one property and defer taxes as long as he or she reinvests the money in “like-kind” property.
Bye-Bye Little Loophole
Now, under the new tax bill, this maneuver is limited clearly and solely to real estate, as measurable by dirt and architecture. Gavrilov & Co thus informs you that “like-kind” is no longer an appropriate strategy for cryptocurrency.
It’s exciting to see the growth of a new type of currency. Only time will tell how popular the crypto-coin will become. We can only predict what might happen as new regulations befall Bitcom owners and owners of other digital currency.
Meanwhile, here at Gavrilov & Co, we’ll keep you informed about your tax compliance in the ever-changing and ever-fascinating world of taxation and regulations, both the crypto- and the traditional kind.