Bitcoin and Cryptocurrency Tax Treatment
Cryptocurrency, such as Ethereum, Ripple and most notably, Bitcoin, have captured the world’s attention. Accounting firms, governments, people, banks and software companies are still figuring out what the implications of virtual currency are and how they will shape markets around the world.
What is Cryptocurrency? Cryptocurrency (also referred to as cyber-currency) is a form of currency that only exists digitally and relies on encryption for the security of transactions. This makes it incredibly secure, but also:
- Irreversible: Once a transaction is confirmed, it can’t be reversed. So, if you accidentally send your money to someone in error, or if the funds are stolen, your funds can’t be replaced.
- International: Regardless of location, your funds can be sent anywhere in the world in just minutes.
- Anonymous: You receive cryptocurrencies on virtual addresses, which are comprised of about 30 randomly selected characters. This makes it difficult to trace funds to accounts or individuals in the real world.
- Secure: Cryptocurrency is locked in a public key cryptography system, so only the owner of the private key can send cryptocurrency.
In addition, anyone can use cryptocurrency, whether it be Bitcoin, Coinbase, or one of a hundred others, the software is available to anyone and it’s free.
Tax Implications for Cryptocurrency
The IRS has provided very little guidance with regard to bitcoin taxation, as of yet. Bitcoins and other cryptocurrencies are considered by the IRS as property for tax purposes, so tax principles that apply to property apply to them. Most likely, in 2018, the IRS will enforce the taxation on cryptocurrency.
When reporting cryptocurrency to the IRS, there are a few things you need to consider:
- For federal tax purposes, cryptocurrency isn’t treated as currency, rather it is considered property.
- When cryptocurrency is received in exchange for products or services, or as salary, the taxation is treated as ordinary income, based on the fair market value at the time of receipt.
- When selling cryptocurrencies, converting cryptocurrency to U.S. dollars, or exchanging one token for another, it is treated as capital gains or losses.
- The amount to time you hold cryptocurrency can determine the taxation for short-term vs. long-term gains.
Keep detailed records of your cryptocurrency transactions. Record the value of the cryptocurrency at the time you receive it and at the time you spend it, exchange it or trade it; this will allow you to accurately calculate gains and losses. As we learn more about cryptocurrency and its value in the market, we expect the IRS to update their policy on cryptocurrency taxes.
KRD offers a full range of accounting and financial advisory services. For more information on how we can improve, update or change your accounting processes, contact KRD today at 847-240-1040 or fill out our online contact form.