Bitcoin and Tax

Published on: 19 Jan, 2018

Bitcoin may have a supposed anonymity but not to the tax official. From April, anyone who bought and then sold cryptocurrencies like Bitcoin must report any profits on their respective federal tax returns. This is a valid demand since the value of Bitcoin increased by 1,500 percent in 2017 and a large number of individuals have presumably made a tidy sum. There could also be losses due to unnatural exuberance similar to stock market.

The Internal Revenue Service or IRS regards cryptocurrency as a kind of property. It is not regarded as currency for tax purpose. This means Bitcoin may not always be treated as similar to stocks. Regulators continue to grapple with the scope of this currency. Tax experts opine that the IRS rules related to cryptocurrency are open to interpretation. They are simply basic guidelines. A few aspects are transparent like paying taxes on cryptocurrency transfers. This is important as the IRS is actively searching for the cryptocurrency tax evaders. To this end, the federal agency sent a notice to Coinbase, the biggest American bitcoin exchange. The IRS wanted the details of all its customers. The company resisted, but a court order compelled it to release 14,000 names. These individuals made transactions above $20,000 while dealing with virtual currencies. Accountants have advised their clients to report every transaction to the IRS to avoid punitive measures.

In case someone continues to hold Bitcoin as their chosen investment, any losses or gains due to this will be regarded as capital assets similar to bond or stocks. This loss or gain is contrasted against the currency's market value at the time of acquiring. It is possible to qualify for the lesser tax associated with capital gains rates for the longer term. Ordinary income classification is linked with short-term gains generated from digital gains. Similar to the stock market, the losses cannot be utilized to offset the capital gains. These can be done if a few specific rules are followed. The losses which were not utilized to offset the gains could be deducted. There is a $3,000 limit on this. The unused losses could be carried into the future.

If any product is purchased using Bitcoin, then there are tax implications on the transaction. If the cryptocurrency is purchased at $1,000 and then used to buy a vehicle when it is worth $18,000, then $17,000 is the capital gain in the long term. Any loss suffered should be likewise referred to tax authorities.

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Marco Zhou

Email: Marco@financialinsiders.com

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