WHAT YOU NEED TO KNOW:
- Investors who are trading on cryptocurrencies like Bitcoin, Ethereum, and Ripple are still at a loss on how to treat it for federal income tax purposes.
- The Internal Revenue Service issued a guidance to taxpayers in 2014 indicating that cryptocurrency will be treated as a capital asset like stocks, bonds, and other investment properties.
- Simply put, it means that capital gains rules apply to any gains or losses.
If you are in the U.S. and not in any country where cryptocurrency gains aren’t taxed, you need to know the guidelines about taxes and cryptocurrency. You may want to understand how to account for your bitcoin or other cryptocurrency holdings before the forthcoming tax season. Here are the basic things you need to know about taxes and cryptocurrency:
- For taxpayers buying and selling cryptocurrency like bitcoin as an investment, gains and losses are calculated the same way as buying and selling stock.
- For taxpayers using cryptocurrency like cash (spending it for goods and services, or using it to buy other cryptocurrencies) the individual transactions may result in a gain or a loss.
Capital gains and losses are calculated by learning how much your cost basis (the cost that you pay for assets) has gone up or down from the time you acquired the cryptocurrency. You’ll know the purchase price and any related costs, like commissions, when you calculate your cost basis. A taxable event is usually a sale or allocation of an asset. In cryptocurrency, a taxable event happens when you trade it for cash or other cryptocurrencies. It’s also taxable whenever you use it to purchase goods and/or services. Another ‘taxes and cryptocurrency’ complication is that IRS doesn’t require third-party reporting for virtual currency. It means that there’s no form 1099-B or equivalent issued at the end of the tax year. Companies like Coinbase will offer a summary of transactions to help you file your taxes. However, if you withdraw cryptocurrency from an exchange, the exchange can no longer record when it happens. It’s like taking money out of the bank. That means cashing cryptocurrency out of an exchange or similar platform may be treated as a sale. The holding period is the time frame between acquisition and the taxable event.
- If you hold an asset for one year or less before a taxable event, it’s considered a short-term gain or loss.
- If you hold an asset for more than one year before a taxable event, it’s considered a long-term gain or loss.
If you lose money, you have a capital loss for tax purposes. You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses and the amount you lose offsets your taxable income for the tax year. In 2017, cryptocurrency has its ups and downs. For tax purposes, you just need to know the beginning and the end, what happens in between doesn’t really matter. Source: Forbes