Today’s average cryptocurrency investor, which numbers in the hundreds of thousands, may not even be aware that they need to pay taxes on their cryptocurrencies. Even in the age of digital cryptocurrencies, there is no longer any reasonable doubt regarding the reporting of capital gains, compliance, auditing, accounting and taxation to the tax authorities. In 2019, reporting your crypto assets and transaction is a legal recommendation from the IRS.
There is a growing list of cryptocurrency businesses and blockchain operations that transact and operate in cryptocurrencies – and they already know about the best tools to help them. As a result, many of their users and clients must also transact through similar means. The ease of purchasing and entering the crypto ecosystem is also getting easier, and more people are participating every day.
However, unlike blockchain businesses, the average investor is unsure of what crypto events are considered “taxable” and which are not. For the prudent investor interested in understanding the full picture of crypto finances, it is imperative to understand taxable events for cryptocurrencies. The push of this digital asset class into the mainstream world is moving at blinding speeds and staying informed is a key ingredient for investors and a business’s success.
Below is a list of the most important taxable events for cryptocurrency investors and businesses.
Buying or Transacting In Crypto
Anytime someone makes a purchase using crypto, for example, purchasing concert tickets, it is considered a taxable event. Additionally, any type of crypto transaction in exchange for goods and services will trigger a taxable event in the eyes of the tax authorities. Any type of buying, selling, trading and transacting with cryptocurrencies are considered taxable events. Additionally, purchasing one type of crypto for another, such as buying Ethereum with Bitcoin, is also taxable.
HODLing Your Cryptocurrencies
For those who do not know what HODL is, it is an unofficial industry crypto-term for those that hold on to their crypto for long periods of time. Because cryptocurrencies are regarded as property, the IRS considers HODLing crypto for over one year as a taxable event. That means investors choosing to sit on their assets for over 365 days will be liable to pay capital gains on their assets as a long-term investment.
While businesses and individuals face several distinct differences when it comes to crypto taxes, all types of mining operations will trigger taxable events. For example, if a person sets up a crypto-mining rig in their home, they are required to track their profit & loss of every cryptocurrency they mine for. Businesses and individuals are both required to monitor and report every transaction that has occured and reference the original price of assets at the time it was mined and/or sold.
Converting Crypto Into Fiat Currency
For investors or users seeking to convert their cryptocurrency earnings into fiat, for any reason, they are required to pay taxes on that activity. This is why it is important to have the best tools to monitor and record all transactions to streamline the accounting and taxation process come tax season in 2020.
Blockchain Forks & Airdrop’s
Even though blockchain forks and airdrop tokens are not entirely the choice of the user, the fact that they received an asset with a noted value means every fork and airdrop needs to be accounted for.
Receiving A Crypto Salary
For many crypto businesses and operations its becoming increasingly popular to pay out employees salaries in fiat, using their personal cryptocurrency funds. While this is still gaining interest, there are issues such as opening bank accounts, issues with high swings of volatility and more. But ultimately, employees or freelancers receiving payment in crypto must report their earnings as it is classified as a taxable event.
Purchasing Crypto With Fiat
While buying an item or service with crypto, or converting to fiat currency remains taxable, the act of first buying your cryptocurrencies via fiat is not a taxable event. Because crypto is considered property, as stated by the IRS in the United States, it is subject to the same rules of capital gains tax. For example, when an investor HODL’s an investment for over one-year, similarly to property, the investor is taxed according to their respective individual tax bracket.
Donations & Gifts In Crypto
For generous investors or non-profit organizations that receive crypto, these events are not regarded as taxable. Any gift in the form of cryptocurrency that is sent to another individual or a non-profit organization, is not deemed a taxable event.
It may be more clear to most that there are far more taxable events than non-taxable in the world of crypto. Most events and transactions that occur are indeed taxable. However, it is important for investors to know that when investors send crypto from one personal wallet to another, or from one personal exchange to a different but personal, crypto wallet – that is regarded as an internal transaction, therefore it is not a taxable event.
Defunct Crypto Wallets & Exchange Shutdowns
Should the unfortunate scenario unfold where your crypto exchange or wallet are no longer active and available, it is important to be proactive and prudent. Investors are solely responsible for keeping a copy of all of their accounts and transactions from their third-party crypto vendors such as an exchange for purchasing crypto.
According to the IRS, investors remain liable as they previously had the capability of originally recording the transactions they no longer have access too. If a service provider, such as an exchange, can no longer provide the necessary information, the chances of leniency from the tax authorities is much higher.
Additionally, it is always important to show good faith and an attempt to rectify the situation, rather then put a “0” in your capital gains section of your schedule-D IRS form.
Now, what's next?
Now that you have a clearer picture of which crypto actions are taxable, you may be ready to learn how to prepare your cryptocurrency taxes on your own. But, if you are a crypto business, or high networth investor, or if you would prefer to outsource your crypto taxes, try looking at some of the top crypto accounting and tax firms you should know about.
To see the complete document from the IRS on handling tax treatment for cryptocurrencies, please click this link here.
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