Cryptocurrencies and other “convertible virtual currencies,” according to the IRS, must be regarded as property rather than currency. When cryptocurrencies are bought, sold, or traded, there are tax implications.
This may sound like a small difference, but it is not. It specifies how cryptocurrencies are taxed, the details you would need to ensure that your taxes are accurately measured, and what tax planning strategies you can use to try to mitigate cryptocurrency transaction taxes.
Cryptocurrency has taken center stage with the IRS over the past few years. Even with the issuance of Revenue Rule 2019-24 and Notice 2014-21, there are still many unanswered cryptocurrency issues, especially in the offshore and international cryptocurrency arenas.
The IRS has confirmed that the virtual currency is that which has no legal tender status in any jurisdiction. When it has an equal value in real money, or if it ever serves in lieu of real currency, it is referred to as a “convertible” virtual currency. It can be exchanged for another currency, either virtual or physical, and it can be traded digitally.
The IRS also suggests that Cryptocurrency is regarded as property and is subject to general tax principles. You must include your gross profits in the fair market value of the currency in U.S. dollars if you are paying in bitcoins for products or services. Transactions using virtual currencies must be recorded in U.S. dollars.
The fair market value of cryptocurrencies can be calculated by converting them to U.S. dollars at the prevailing exchange rate at the time they are received.
You would either have a capital gain or a capital loss if you dispose of Cryptocurrency because it is considered to be property for tax purposes. Even if you’re paying in virtual currencies, the gain is called income, which is taxable.
You will purchase it first, as you would with any other form of property, usually by exchanging money for the asset. After that, you own the property for a period of time before selling, giving it away, trading it, or otherwise disposing of it. At this point, capital gains taxes are due.
When a property is sold, the following four items occur:
- The income is realized from any profit
- Gain is determined by the change in the dollar value between the cost base or purchase price and the gross proceeds earned from the disposal or sale price
- The tax rate that occurs relies on whether the property has been owned for one year or less (a short-term gain) or for more than one year (a long-term gain)
- Property disposal is reported on your tax return using Schedule D and Form 8949 or Form 4797. These forms ask you to present your numbers when you measure your profit or loss. You’re going to make your calculations right on the form, by instructions
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