Important Tax Considerations
lthough cryptocurrency is thought of as digital money by those who purchase, exchange, sell and spend it, the IRS does not consider any of the many cryptocurrencies as currency for tax purposes. Instead, the IRS considers cryptocurrencies as ‘intangible property’. Intangible property is something a corporation or person can have transferable ownership of, but is not physical in nature.
The IRS has been slow to publish detailed guidance on cryptocurrency transactions, but did release this guidance in 2014. There are some transactions that are obviously taxable transactions. For example, if you buy Bitcoin worth $5,000 and later sell it for $10,000, you will need to report $5,000 in capital gains. If you held onto the currency for one year or less, it would be subject to short-term capital gains and could be taxed up to 39% in 2017. If you hold it for longer than two years, the long-term rate (up to 20%) applies.
However, what about when you purchase Ethereum with Bitcoin? Is that taxable? It most likely is. Let’s say you originally purchased $100 worth of Bitcoin, but when you exchanged it for Ethereum, the Bitcoin was worth $300. You would likely need to report the $200 difference on your taxes.
Hardforks, where investors receive the new cryptocurrency (think Bitcoin and Bitcoin Cash) in their wallets at no cost, are another example of where tax law applies. If you received Bitcoin Cash because of previous holdings in Bitcoin, the value of the Bitcoin Cash is taxable.
Cryptocurrency transactions are vastly underreported and the IRS is starting to take notice. The IRS has issued a summons to Coinbase asking for information about all its customers from January 1, 2013 – January 31, 2015. The IRS may be slow in playing catch up, but it’s not too soon to get advice from a tax professional on how to manage your cryptocurrency transactions.
Here are some recent articles that examine the tax implications of cryptocurrency transactions:
Forbes, October 30, 1017
How Cryptocurrency Investors Can Avert IRS Attack by Robert Green, CPA
The Tax Advisor, April 20, 2017
Cryptocurrency and Taxes by Craig W. Smalley
Forbes, August 15, 1017
Cryptocurrency Traders Risk IRS Trouble With Like-Kind Exchanges by Robert Green, CPA
Reason.com, January 24, 2017
How the IRS Could Cripple Cryptocurrency by Andrea O’Sullivan