Cryptocurrency and Taxes 101

Cryptocurrency and Taxes 101

Understand How Cryptocurrency and Taxes Work in 2018

Cryptocurrency had a massive year in 2017. As a result of its skyrocketing popularity and adoption, this tax season many are wondering how to handle this new form of currency when filing taxes. Is it considered a form of income? Is there a Ripple, Dash, or Bitcoin tax?

Let’s take a closer look at what to know about cryptocurrency and taxes.

Cryptocurrency is Taxable

The IRS does consider cryptocurrency a taxable asset. When you go to file your taxes, you will need to address how much cryptocurrency you possessed in the previous year. However, the government treats cryptocurrency like property rather than traditional cash. Think of it as a stock or a bond.

That’s why when filling out your return you’ll be thinking about whether you received a capital gain or a capital loss from your cryptocurrency, as you would with stocks or bonds.

Calculating Capital Gains

You’ll need to look at the value at time of purchase (how much you paid for the cryptocurrency) and compare against what it’s worth now. You can have short-term gains (if you held the cryptocurrency for less than a year before selling or exchanging) or long-term gains (if you held the cryptocurrency for more than a year before selling or exchanging). Note that long-term gains are taxed at a reduced rate.

Keep in mind that just because you didn’t “cash out” any cryptocurrency in 2017 doesn’t mean you didn’t have any taxable events. If you used the cryptocurrency to pay for goods or services or traded one cryptocurrency for another, that’s considered a taxable event.

Calculating Capital Losses

Maybe instead of gaining money from your Bitcoin or Ripple within the past year, you ended up losing money. You can record that as a capital loss. Know that you can claim up to $3,000 of capital losses, and that money will be taken off your total taxable income for the year. As it stands now, any loss greater than $3,000 would roll forward and be applied to tax returns in future years.

Note: You’re going to be reporting these gains and losses on a Schedule D form, and transfer that information to the reconciliation part of your federal form 1040. There’s no need to file a Schedule D though if you didn’t gain or lose value with your cryptocurrency during the year (i.e., you just held onto it without taxable events).

Receiving Cryptocurrency

Now, if someone paid you for a good or service with cryptocurrency, you’ll need to count that as part of your income for the year. The value of the transaction is based on its value at the time of receipt – rather than the current value of the cryptocurrency.

There’s a lot that goes into how the government approaches cryptocurrency and taxes. Given that this form of currency is new, complex, and relatively volatile, it’s likely that how cryptocurrencies are taxed may change over the next few years as its application (and the government’s understanding of it) evolves over time. The surest way to make sure you’re up to date with the latest cryptocurrency tax regulations is to work with tax professionals when filing.

If you are having trouble understanding cryptocurrency and taxes, contact Tobin & Collins today! Their experienced team of CPA’s will help make tax season less stressful for you, your business, and family.