What exactly is cryptocurrency? Dictionary.com defines cryptocurrency as follows: “a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
A few examples of cryptocurrency are Bitcoin, Ethereum, and Lightcoin. The IRS needs to know about any digital currencies that you own. If you have chosen to invest in or utilize digital currencies, you should report them on your taxes. However, it isn’t what you think.
With cryptocurrency, there are no banks involved in transactions. Instead, there is an enormous database known as a Blockchain. The Blockchain functions as a secure means for peer to peer transactions.
The Internal Revenue Service sees cryptocurrency as property. Hence, there may be implications regarding any capital gains. Thus far, the IRS has yet to provide a whole lot of guidance about crypto and tax laws, but they are indeed checking on all digital currency. The IRS has already requested that Coinbase show data on all its 13,000+ users. If you are selling, buying, or trading crypto currently, all these activities have capital gains implications. In the event you are paid in crypto, you must report that as income.
The following are several things to be mindful of. Trading crypto produces capital gains and losses. Exchanging it is to be treated as though it is being sold and is subject to capital gains. If crypto is used to pay for goods or services, it is to be reported as income. Spending crypto is a taxable affair and is treated as a capital loss or gain. In conversions of crypto to paper capital, it counts as capital gains. The mining of coins is seen as income equivalent to the fair market value of the crypto coins. Cryptocurrency is quickly gaining popularity, and its values continue to increase. Once again, there are no banks involved in crypto, but don’t try to conceal it from the IRS. Be cognizant that cryptocurrency is considered as income, so always treat it accordingly.