Most people will recognize the name Cryptocurrency and Bitcoin, even if you’re not really sure what it is or how it works. What you probably didn’t know is that there is more than 4,500 cryptocurrencies available. You also may not realize that there are hidden tax complications associated with every cryptocurrency transaction.
What you should know.
- You’re on the IRS’s radar. Because virtual currency is fairly new, the IRS is pretty concerned about any potential inaccuracies and fraud associated on tax returns using cryptocurrency. That’s why the 1st question below your name and address on your tax return is, “Over the past year, did you take part in any virtual currency transactions?
- Tax consequences for each transaction. The IRS considers cryptocurrency as an investment and every transaction is treated as a capital gain or loss. Although the IRS doesn’t bother with the value of the dollar at every transaction, virtual currency matters. That’s because, for example: you might buy Bitcoin for $5 and a couple months later it could be worth $10. Then if you buy something with that $10 worth of Bitcoin, you'll have a $5 taxable short-term gain that you will need to be report on your tax return. Tracking the gains and losses can get very complicated if you spend a lot of cryptocurrency.
- Big gains = big taxes. For gains on the value of cryptocurrencies you sell, there’s no cap on the amount of taxes you may owe in just one year. However, your losses may take many years to recoup due to the annual loss limit of $3,000, against income. Making things even more complex, virtual currencies can have dramatic valuation changes, more than most traditional investment securities. For that reason, whenever you use or sell cryptocurrencies, you will need to save appropriately for the taxes you will owe.
- Bookkeeping responsibilities. It’s imperative that you keep accurate records so you can correctly report all virtual currency gains and losses on your income tax return and in the event of an audit, validate all of your transactions.
At Summit CPA we offer multiple resources to assist you with all of your tax and financial planning needs. Contact our office at 866-497-9761 to schedule an appointment with our advisors.