Tax Consequences of Digital Currency
June 10, 2019
The cryptocurrency market skyrocketed in late 2017. Bitcoin, the most well-known form of digital currency, reached an all-time high value of near $20,000 a coin at the end of 2017. Today, Bitcoin is valued around $8,500. Digital currency investors who purchased the cryptocurrency may not have considered the tax ramifications of their transactions. Whether investors made money or lost money trading the currency, their transaction activity must be reported to the IRS. In this article we break down the basic tax reporting of digital currency transactions.
Understanding how cryptocurrency works can be extremely overwhelming and confusing for those who are not experienced in technology or financial markets. Simply put, digital currency can be alternative form of payment to cash, credit cards and checks, but it is not legal tender. Most investors aren’t using it as currency for payment. Instead, they are using it as a speculative investment trying to make a profit.
For US Federal income tax purposes, currently digital currency is generally treated as property, such as stocks, bonds or real estate. Currently, a sale of digital cryptocurrency should be reported as either short-term or long-term capital gains or losses. Buying cryptocurrency is not a taxable event. You don’t realize gains or losses until you trade, use, or sell your digital currency. Short-term capital gains are taxed at ordinary income rates. Long-term capital gains are taxed at favorable tax rates. Net capital losses are limited to the standard $3,000 capital loss deduction per year and the excess is carried over to the next year.
Cryptocurrency platforms do not currently issue form 1099s for transactions therefore it is important to keep detailed records of activity and fees. To calculate your realized gain or loss, you need to gather the following information:
- When you purchased the cryptocurrency?
- How much you paid for it?
- When you sold it?
- What you received for it?
Another issue an investor must consider is which platform they use to purchase their currency. Digital currency owners whose assets are held in foreign exchange accounts may be required to report their information pertaining to these holding accounts on FinCEN Form 114 or IRS Form 8938. The FinCEN Form 114 is a standalone filing while the Form 8938 is filed with an individual’s tax return. Both forms are due by April 15, with the option to be extended until October 15.
If you would like to speak with a financial advisor in more detail, please contact SC&H Financial Advisors.
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